Is Australia staring at stagflation in 2022?

Amid changing headwinds, the inflation forecast for Australia remains convoluted as the country enters another year marked with uncertainty. While inflation anxiety is dominant among some economists, other experts believe that inflationary expectations might be overblown. These diverging views come as uncertain policy changes lie in backdrop. The RBA has hinted at the possibility of a rate hike; however, the bank has not given a clear timeline for the same.

The supply constraints taking shape globally have also contributed to the uncertainty around inflation in the coming months. Australia has also faced the brunt of supply constraints, with prices rising in the short run. However, experts suggest that supply constraints may not impact prices with such intensity in the coming year.

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Reasons to worry about rising inflation

The Australian property price journey has been unmatched by any other sector within the country. Housing pries have risen at an alarming rate, perpetually reaching a new high. International pressure on fuel and natural gas have also worsened the problem at hand.

However, an interest rate hike might put downward pressure on inflation. A rise in interest rates would have a direct impact on the housing prices. As lending becomes expensive, the housing sector is expected to cool off, especially as buyers develop expectations of further rate hikes.

Overall, experts agree that the economy may be in a transient phase, where inflation may persist for period of 6-12 months. Some other experts argue that a period as large as 12 months can be considered permanent, and not transitory. However, the source of the existing inflation does not seem as worrisome, as local supply chain resilience is expected to provide some relief from rising prices.

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Is stagflation a possibility?

It can be safely assumed that stagflation may not a realistic possibility for Australia in 2022. Stagflation is a combination of low economic growth, as well as rising unemployment and extremely high levels inflation. Though a proportion of experts are speculating inflation could persist, the indications for the job market seem positive.

Rising job advertisements have provided a better-than-expected outlook for 2022. Even as surging Omicron cases loom in the background, the predictions for employment remain upbeat. Data by Australia and New Zealand Bank (ANZ) suggests that job ads have risen by 7.4% in November 2021, and this momentum is expected to continue in 2022 as well.

Additionally, forecasts for economic recovery are also buoyant, as the RBA has highlighted that the country would be experiencing increased GDP growth. In the mid-year economic and fiscal outlook (myefo), the RBA expects the GDP to grow by 5.5% in 2022, followed by a slowdown to 2.5% in 2023.

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Is Australia staring at stagflation in 2022?

Bottom Line

In a nutshell, economic recovery is expected to continue in the coming year, with labour market developing resilience along the way. Additionally, a recovery in wages could further bring out a radical change in policy action. If wages growth exceeds inflation growth, then it is highly likely that contractionary policy measures would be adopted.

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