Why are people talking about stagflation again, and what does it mean anyway?

What stagflation means

Put simply, ‘stagflation’ is a situation when prices stay stubbornly high (inflation) even though an economy has run out of steam (stagnation). It is not just inflation and it’s not just a downturn or recession - it’s the overlap between the two.

The term is usually traced to British politician Iain Macleod, who used it when he told the UK’s parliament in 1965 that Britain faced “the worst of both worlds”.

The reason it’s back in the global conversation is that the world is experiencing an energy shock at a point in time when a number of developed economies have seen inflation creeping higher, creating conditions that could lead to stagflation in the future.

Why stagflation is back in the news

CBA Head of Australian Economics Belinda Allen says we’re facing the risk of the energy shock “lifting inflation further while also weighing on growth”.

Since the start of the conflict between the US, Israel and Iran, which has severely disrupted shipping and oil supplies, the global oil benchmark Brent crude price has risen more than 50%.

That’s inflated petrol, diesel and jet fuel prices, which in turn is adding to transport and delivery costs and putting pressure on the price of goods and services right across the economy. At the same time, Australia’s annual inflation rate remains above the RBA’s target band of 2% to 3%. When it’s too high, inflation eats away at people’s purchasing power and devalues the savings they’ve got.

That situation has brought two interest rate increases already in 2026, with the RBA lifting rates in both February and March to try to put the brakes on economic activity to get inflation back under control. Commonwealth Bank economists expect that another increase will follow in May, although it will be a line-ball decision.

Historical rates of inflation

Why is stagflation hard to fix?

Normally, if inflation is too high, central banks lift interest rates to cool things off, putting the brakes on spending by making borrowing more expensive. If growth is weak, they can lower rates again to help boost economic activity. But when both problems show up together, every option hurts. Higher rates may help calm inflation, but they can also weaken spending and hurt employment. Lower rates support growth, but can also keep inflation alive. All of which makes stagflation tricky to fix.

Have we been here before?

On the surface at least, oil shocks and inflation echo the economic environment of the 1970s, when events in the Middle East sent oil prices soaring and contributed to the economic malaise that affected many countries into the 1980s.

That’s the main reason people really worry about stagflation returning today.

What’s different this time?

While Australia’s current inflation rate of 3.7% is regarded as being too high, it’s still much lower than in the 1970s. According to the RBA, inflation was already around 10% when the first shock hit in late 1973, after the OPEC oil embargo, and it later reached 17.5%.

Unemployment was also worse, with the RBA noting it rose from around 2% in the early 1970s to about 5% in the mid-1970s, before climbing much higher again in the early 1980s after a second oil shock followed the Iranian revolution in 1979. Today Australia’s seasonally adjusted unemployment rate is 4.3%.

The Australian economy also grew 0.8 per cent in the December quarter of 2025 and 2.6 per cent over the year. And as CommBank economists have pointed out, Australian households are entering this period with stronger “financial buffers” - including good incomes and being ahead on their mortgage payments - than in some earlier economic cycles.

So while inflation is a concern, there’s still economic growth and a very solid jobs market for workers.

What happens next?

If oil prices settle, supply routes stabilise and the pass-through of transport and energy costs into the prices of goods and services remains limited, Australia may get a burst of petrol pump pain without heading toward stagflation.

But if the oil shock lingers and pushes prices higher, the risk of stagflation rises.