Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 432

What’s the truth about stagflation?

Stagflation occurs when growth stalls, inflation surges and unemployment stays stubbornly high. It’s unsettling when the term starts getting global attention, as it is now, but are we really facing the first resurgence of stagflation in 40 years?

If ‘stagflation’ talk is referring back to the oil shocks of the 1970s – when the US fell into recession as inflation rose sharply – we’re only there metaphorically. In other words, the US, and the global economy more broadly, currently seem far from recession.

In the 1970s the US suffered five quarters of negative real gross domestic product (GDP) growth in 1974 and 1975, and while ‘supply shocks’ are hitting us now as they did then, the comparison only goes so far.

First, while the global economy is suffering simultaneous downward pressure on activity and upward pressure on prices, economic activity in advanced economies remains well-supported, even if growth forecasts are vulnerable to the downside.

Second, to the extent the 1970s contains some lessons, it is possible that that decade reinforces the ‘transitory’ effect of supply shocks on inflation, since inflation did fall meaningfully in the US after the first oil shock in 1973-74.

Finally, while the US has a bigger ‘flation’ problem than a ‘stag’ problem, we continue to underline the risks to global activity coming from China, where ‘stag’ seems to be the dominant risk now, holding out the possibility that China is in for a deeper and longer slowdown than the market is currently braced for.

Trade growth looks particularly vulnerable

Breaks in global transport network supply chains are increasingly apparent, and power shortages in China may put downward pressure on trade growth as a result of the widespread hit to Chinese manufacturing that’s currently occurring.

Simultaneous upward pressure on prices and downward pressure on activity are especially clear now in Europe and the US.

Growth remains strong, but ‘stagflation’ headwinds to the Eurozone economy are blowing ever stronger, and in the US where job growth has proved disappointing. In the Eurozone, supply shortages which had already triggered a decoupling of production from orders are now aggravated by a huge spike in energy prices.

While energy accounts for only 3% of firms’ production cost on average across the EU, some sectors such as land and air transport or power generation will suffer significantly, and rationing could affect others.

This increases risk of business closures and insolvencies, with knock-on effects to the wider economy. Households spend 5% of the consumption basket on energy, and although we expect government intervention to cushion some of the impact of rising energy prices, we still expect 10% to 20% price increases, cutting disposable incomes by 0.5-1%.

Falling energy prices later in 2022 will then drive the reverse effect but shift growth from 2022 to 2023. Yet with GDP growth next year expected to be close to 4% both in the Eurozone and in the US, we remain far from ‘stag’ risks in economies whose potential growth is below 2%.

‘Stagflation’ in a metaphorical sense has been evident for months

As markets are forward looking, the potential for inflation and economic surprises has already been priced into market indices, reducing the risk of shock and policy intervention.

‘Stagflation’ also implies recession, and as we have noted, we see this as a remote risk on current data.

While there is no formal definition of stagflation, the term entered public consciousness in the 1970s against a background of a genuine collapse in economic activity as inflationary pressures simultaneously surged.

What makes the 1970s especially interesting as a historical parallel is that, as today, the proximate cause was a negative supply shock, in the form of a sharp increase in food prices and, especially, in energy prices following OPEC’s announcement in October 1973 that the posted price of oil would rise from US$3.01 per barrel to US$5.11.

This was followed by a decision a few days later to cut off oil shipments to the US, causing a further surge in the price. In the US at least, the inflation problem was accentuated by the end of the wage-price controls that the Nixon administration had introduced after suspending the dollar’s convertibility into gold in the summer of 1971.

The result of these actions caused chaos in the global economy, as world GDP growth fell from 6.3% in 1973 to 1.2% in 1975, and the US itself suffered five consecutive quarters of negative year-on-year GDP growth starting in Q2 1974.

What are the parallels to the 1970s?

The real price of energy has risen sharply recently, but its impact is less significant than it was 50 years ago. It is clear that while real oil prices are still quite low compared to historical pressure points, the real price of gas is indeed a concern on the face of it, reaching historically high levels.

Yet the macro impact of elevated energy prices isn’t what it used to be; diversified supply, alternative energy supplies, country fuel stockpiles and lessons learnt from previous shocks has led to the decline of energy’s impact on GDP over the past 50 years.

It would take a near-unimaginable rise in energy prices to induce a global recession, unless high energy prices shock financial markets.

To illustrate how far we are from recession, it is worth referring to an exercise based on simulations in the Oxford Economics Model. In order to get that model to predict near-zero global growth next year, a US$500 a barrel oil price is needed to shock the current baseline scenario.

In our view, while energy has the potential to create shocks the larger risk to lower growth lies with China, particularly as Chinese authorities seem determined to change the nation’s growth model and wean the economy off its dependence on real estate.

 

David Lubin is Head of Emerging Markets Economics for Citi, a sponsor of Firstlinks. Information contained in this article is general in nature and does not take into account your personal situation.

For other articles by Citi, see here.

 

  •   3 November 2021
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

The folly of the Iran war

3 ways to fix Australia’s affordability crisis

Why a deflationary shock is near

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Latest from Morningstar

Does an American retirement rule work for Australians?

The 4% rule has survived decades of scrutiny, but Australia's retirement system changes the equation in ways most overlook. Before accepting or rejecting this rule of thumb, it pays to understand what really drives retirement outcomes.

Shares

Glencore lands on the ASX. Should BHP and Rio shareholders switch?

A coal-heavy miner with governance concerns isn't the obvious choice for investors. Yet, Glencore's ASX listing may offer something BHP and Rio can't. The challenge is working out whether the opportunity outweighs the risks.

Why does the system treat capital gains and losses differently?

Investors are often told not to let tax policy drive their investment decisions. Yet, under the new CGT rules, portfolio construction, volatility and even how assets are owned may have an outsized impact on their final outcome.

Economy

Three common sense reforms that Australia needs

What do frozen bank accounts, mortgage traps and pension penalties have in common? They're all symptoms of a system that makes life much harder. Yet the obvious solutions seem to have escaped the attention of Canberra.

Shares

The hidden cost of government debt for investors

Some of the important effects of rising public debt never make the headlines. Research shows the immediate effects may already be unfolding, influencing corporate behaviour in ways that many investors would never suspect.

Investment strategies

When do fundamentals matter?

Is fundamental investing losing its grip on markets? Investors continue to search for valuation-based explanations for every price move, but the dominant force behind short-term returns may be something else altogether.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.