Jason Featherby from Leeuwin Wealth joined Doug on Mornings to talk about the term, ‘Stagflation’ and why it is back in the financial spotlight.
What is Stagflation?
Jason began by saying it is not a good word, but rather a nasty word. It is a combination of stagnant and having inflation at the same time.
“It refers to a period where inflation is high, so the cost of living rises persistently, which we’re seeing that at the moment.”
He said it has to do with weak or slowing economic growth.
“We haven’t seen that yet, but we need to watch out for that.”
It is also about rising employment.
“Essentially, we’ve got a rising cost of living, less people working, the economy’s not going well, and so the usual tools of government don’t tend to work as well, or the raising or lowering of interest rates don’t help.”
Prices Are Going Up
Jason said, these reports are indicating that everything is going backwards, except for prices.
“Prices keep going up. The rest of us are going nowhere. People are losing their jobs. So the combination, as I said, is especially difficult because normal policy tools don’t work.”
He said that cutting rates could boost growth but worsen inflation.
“The raising rates we might see can curb inflation, but then increase unemployment, and therefore shrink growth.”
The Fuel Crisis
Jason said a fuel crisis like this hasn’t happened since the 1970s.
“At that point, the oil shocks drove inflation sharply higher and economic growth and unemployment went the other way.”
Recession
When asked if this would lead to a recession, Jason said, there are distinct differences between a recession and what we are experiencing with stagflation.
“Recession is 2 quarters of negative growth. Technically. So your economic growth shrinks 2 quarters in a row.”
A recession can be resolved through a series of policies.
“Stagflation is very difficult, as I just pointed out, to make policies to get ourselves out of it. And I think we had persistent high inflation, high interest rates, and again, for those that were around and borrowed in the late 70s and early 80s, interest rates at 15, 16, 18%.”
He said, he’s hesitant to believe we will get there due to the Reserve Bank.
“They’ll raise rates before inflation gets anywhere near 10%, 5%.”
Key Drivers of Inflation
Jason wanted to reiterate that we are not in stagflation yet, but there are warning signs emerging.
“Inflation remains above where the Reserve Bank wants it to be. It is still running at 4%. The Reserve Bank wants it no higher than 3%. There is now recent pressure coming from that fuel energy insurance and service costs.”
He said, the Reserve Bank does expect inflation to remain above target for some time, which will raise concerns about rising interest rates.
Unemployment
“Unemployment is still low, at 4.3% as of March this year, which is good for now.”
The Reserve Bank does however, forecast a gradual rise in unemployment as high interest rates kick in.
“Our growth rate at the moment in Australia is 2.6%. It’s forecast to drop to 2%. So that’s still okay, but dropping. The cash rates at 4%, markets are expecting further increases from the Reserve Bank as it prioritises its fight against inflation, even at the risk of higher unemployment.”
Jason continued to say that we need to keep an eye on interest rates.
“Sadly, a lot of the growth in wages, is in the public sector. People who work in government, those wages have grown 4%.”
There are skill shortages in healthcare, construction. Resources are also pushing wages higher, adding to cost pressures that feed back into the economy.
“For stagflation to truly emerge in Australia, economists suggest that our unemployment rate would need to be closer to 6%. So it doesn’t sound a couple of percent, but that’s a lot of people out of work. So look, we’ve got to get towards 6 before stagflation remains. And at the same time, inflation would have to remain higher.”
Increase per Industry
Doug asked about the accuracy of the numbers Jason used, because of aggregated data across industries.
“Yes, inflation is measured, so it is accurate, but it is just a basket of goods. It’s a snapshot of various goods and services that are well known, travel, fuel, insurances, healthcare, things like that. They pile into the bucket and they come up with a price of… things going up.”
Rising Costs
Among these things are:
- Healthcare, increasing by 10%,
- Building costs, increasing by 20%
“However, the price of TVs and couches are falling because nobody is buying them anymore and the average is 4%,” said Jason.
He also said it is relative to the state and major cities within it.
“In Perth, we might be feeling the cost of pressures, cost of rising pressure costs more than over in Melbourne.”
Practical Steps
Jason offered the following practical steps to prepare for tough times.
Budget
“Think about what is coming in and going out, budget-wise.”
He said the act of budgeting is not fun, but acquiring a budget planner could be the first step for some people.
“ASIC’s Money Smart website has a really good simple one you can use and you can have it Excel format so you can type it in or print it. Get your bank statements and just work out what’s going out and try and see if there’s any duplications or things that you aren’t paying for.”
Stockpile Cash
“Maybe get ahead of your mortgage if you can because we just said here we think that interest rates might be higher in 6 or 12 months than they are now. So if you can get in front and the pressure hits then things aren’t going to hurt as badly.”
Drive Less, Spend Less
“Even though it might not be biting yet, it’s a really good time to just reflect on where you’re putting your money and what you might be able to do to bolster or batten down the hatches if a recession or stagflation were to come about.”
Jason said we haven’t had a proper recession for over 20 years, but COVID was the closest we have come since then.
“We were more worried about keeping healthy than we were about our bank balances at that time and we couldn’t leave the house anyway. So that was our last little mini recession.”
He said, not many of us have actually seen a recession so it is important that we prepare.
“Don’t panic. Just make sure that you understand what’s coming in, what’s going out, and trim any fat.”
Superannuation and Stock
Finally, Jason said now is a good time to look at the share market.
“The markets had a shock when the U.S., Iraq and Iran went to war. They fell, they rebounded pretty quickly. Our markets in the US are back at record highs, would you believe, despite all of the volatility and what’s going on.”
With this in mind, Jason encouraged us to ensure investments match our own tolerance for risk.
“If you’re getting close to retirement, you don’t want all your money in shares. So just review your asset allocation, consider inflation resilient assets.”
He said some equities, commodities and real assets have historically done better in periods of high inflation.
“Airports and toll roads, infrastructure assets, they can pass on rising costs pretty quickly. Our resource companies tend to do better when there’s high inflation as well. Maintain liquidity, ensure you’ve got some cash set aside.”
In the case that the markets do fall, there is flexibility and the ability to take advantage of the opportunity to buy back in.
“You can strengthen your household balance sheet. With interest rates higher, it’s important to look at your budget, manage your debt carefully, ensure you can cope if interest rates rise.”
Check out the full chat with Jason Featherby below.