Earlier this week, the World Bank cut its global economic growth forecast and warned of the risk of 1970s-type global stagflation, with a coincidence of high inflation and low growth and high unemployment. I had already decided to cover stagflation in this week’s Economics Explored episode, so it was great that the World Bank released its analysis of the risk of global stagflation in time for me and my colleague Arturo Espinoza to review and discuss it on the show. You can listen to my latest episode “Stagflation: Be alert, not alarmed” via podcasting apps such as Apple Podcasts and Google Podcasts, and using the embedded player below in the website version of this post.
The World Bank report is available via Stagflation Risk Rises Amid Sharp Slowdown in Growth. There are similarities with the 1973-75 period, such as a supply-side commodity price shock, but there are also important differences, as the World Bank sets out in its report and as the BIS also discussed last month (see Commodity market disruptions, growth and inflation).
From 28:47 of my latest episode, you can listen to me discussing the concept of a wage-price spiral – where price and wage increases reinforce each other and wage and price inflation rates accelerate to high levels. I explain why Prime Minister Albanese’s election-campaign comment about how his government would support wage increases to compensate for recent inflation (see the chart below) was of concern to many economists and commentators. Of course, no one wants real wages to fall and the PM’s comment sounded fair enough, but it made economists worry he was moving in the direction of adopting a policy of automatic indexation of wages to CPI. In another BIS publication, Are major advanced economies on the verge of a wage-price spiral?, which Arturo and I discuss in the episode, the BIS warns against automatic indexation of wages to inflation as it can mean that high inflation becomes a self-fulfilling prophecy. The BIS wrote:
Labour market institutions also influence the likelihood of a wage-price spiral emerging. Automatic wage indexation and cost-of-living adjustment (COLA) clauses make wage-price spirals more likely.
In its submission to the Fair Work Commission earlier this month, the new Australian Government recommended wages for the lowest-paid keep up with inflation, which thankfully is something less than full indexation for all wage earners across the economy. I suspect that next year, given it’s now receiving economic policy advice from the Treasury and other central agencies, the Government will be careful not to make bold claims about how much wages should increase as the PM did during the campaign. I’m sure many Treasury and Finance officials would have disagreed with the submission the Government made to the Commission, but because the PM had committed to wages keeping up with inflation during the campaign, they wouldn’t have formally raised any objections. The Fair Work Commission’s decision for 2022 will come out in the next couple of weeks, so look out for that and whether the Commission agrees with the Government or recommends wage increases less than the current 5.1% inflation rate.
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