Economist Richard Holden believes Australia won’t experience 1970s style stagflation (i.e. low economic growth and high inflation) because the Reserve Bank of Australia (RBA) won’t let it happen and will aggressively hike rates before any wage-price spiral could take effect:
If people expect higher inflation, they will try to raise prices or demand higher wages. In fact, they will try to do that to protect their real purchasing power. So, a 1 per cent increase in inflation expectations will manifest itself in 1 per cent higher rate of actual inflation.
The lesson was unmistakeable: central bankers need to keep inflation expectations under control. With those expectations out of control in the late ’70s, bold action was required.
