The increasing price of fuel has started to hit Aussies hard, with the cost of filling a tank up by nearly 20 per cent in the space of just a few weeks.
The rising costs of living has sparked a lot of suggestions that Australia may be heading toward ‘stagflation’.
What is stagflation?
Stagflation occurs when an economy experiences high inflation at the same time as low economic growth and high unemployment.
Low unemployment should lead to increased spending and wage growth (even more spending). As a result, the prices of goods and services would increase (i.e. high inflation).
In practical terms, stagflation means that the costs of living, fuel, groceries and coffee are going up at a much faster rate than incomes. This makes it harder to save money and spend on discretionary things like holidays.
You can see why it’s something we would want to avoid.
Are we seeing stagflation today?
Australia has high inflation and low economic growth, but it also has a very low unemployment rate which hasn’t yet resulted in wage growth.
Inflation, on the other hand, is high because of supply chain issues. A lot of businesses around the world experienced shutdowns and border restrictions as a result of Covid, and we’ve been trying to play catch up ever since.
The war in Ukraine has added further delay to that ‘catch up’ process.
So, while we’re technically not experiencing stagflation, we are experiencing a version of it.
We have high inflation because of a lack of supply rather than an increase in demand from low unemployment and wage growth. The Reserve Bank of Australia says those supply pressures – along with the resulting inflation – will ease in coming months as borders reopen and the lack of lockdowns allow us to catch up.
What can we do about it?
The Reserve Bank of Australia (RBA) is the gatekeeper of our economy, increasing or decreasing interest rates as a way to control inflation and keep everything in balance and harmony.
It has said it will keep interest rates low until we are getting paid more, which would offset the cost of inflation and/or increased interest rates.
Australian housing has been in a version of stagflation for decades.
In Bulletproof Investing, I wrote about how the median house price in Australia has increased by as much as 5 per cent per annum above inflation for the past 30 plus years.
The same numbers apply to rents in Australia, with rents increasing by as much as 2 per cent per annum above inflation in the same period.
The by-product is that the cost of a house in Australia is now 10 times as much as our average incomes.
Why? Because we don’t build enough houses to match demand.
And it’s not an easy fix. It can take years to supply a new house; you’ve got to go through the state and local government approval processes, upgrade services like sewerage, water and electricity and then there’s the actual building process itself.
When the increase in demand occurs, there is a lag of a few years to meet that demand, by which time the demand has dropped off, before we catch up. At which point the cycle repeats itself.
The solution is to make it quicker and easier to supply new housing, but that’s something Governments have been trying – and failing at – for decades. That’s because it’s a very complex problem to try and solve.
For the everyday person, the solution when it comes to housing ‘stagflation’ is to participate. Grow our wealth at a rate faster than wages and inflation.
The safest and best way that I know to do that is to buy land and build a house on that land that you can rent out. The house value and rental income will both increase at a rate higher than inflation because of an increase in demand and lack of suppl