‘Stagflationary impulse’: inflation risks rise as economic growth cools

Australia is entering a period where the economy is expected to lose momentum, but inflation remains stubbornly high, says CBA Head of Australian Economics Belinda Allen.

Speaking on the latest episode of the CommBank View: Economics & Markets podcast, Allen said the economy is heading into what could be described as a "stagflationary impulse", a situation where growth slows but prices continue to rise.

She stressed, though, that this is not a situation she expects to last.

"We don't think we're going into a stagflation episode. We'll call it a 'stagflationary impulse', but we think this is more of a temporary situation," she said.

Stagflation is usually linked to "persistently high inflation and persistently low growth, as well as a lift in inflation expectations", Allen said.

Why inflation remains the big concern

Earlier this week the Reserve Bank of Australia lifted interest rates for the third time this year, taking the cash rate to 4.35 per cent, underscoring its focus on bringing inflation back under control.

Allen said rising global energy costs are playing a key role, flowing through to Australian households and businesses and helping keep inflation elevated.

"There is a very large supply shock because of the lifting oil price and lower oil supply into global markets at the moment, that is going to lead to an income shock here in Australia," she said.

When incomes are squeezed by higher costs, spending typically slows. But despite the uncertainty, Allen said, inflation pressures were strong enough for the RBA to raise rates again in May.

"Ultimately, it was the inflation story that really saw them rally around the rate hike again in May," she said.