Are We Living in the 70s? Addressing Stagflation

The 70’s gave rise to a new economic phenomenon, Stagflation. Stagflation is the term used to describe a period of high inflation combined with high unemployment and slow to no economic growth. A phenomenon once thought impossible and every central banker’s worst nightmare.

To say there are similarities between the 70’s and today would be undeniable. In the 70’s there were soaring energy prices caused by the Arab oil embargo, made worse by the 1979 Iranian oil embargo. This led to significantly higher oil prices resulting in inflation. In Australia the inflation rate rose from roughly 6% in 1972 to peak at 17.5% in 1975.

Let’s compare that to today. The Annual CPI inflation was less than 1% in 2020 but had risen to 6.1% by the June 2022 quarter. Further parallels with the 70’s Arab oil embargo can be seen with the 2022 sanctions on Russian oil.

It remains to be seen if the decade will play out like the 70’s. There are certainly some parallels, (with the stark expectation that unemployment is at multi-decade lows tin Australia). If we are to face a decade reminiscent of the 70’s with continued stagflation, what would it mean and what can businesses do to prepare?

Consumer and investor psyche in the 70’s was impacted by inflation expectations (the belief inflation would be entrenched/long term) and that encourage discouraged investment. When inflation is rising investors prefer profitable companies or companies with a near term path to profitability. The reason being that any company that isn’t cash flow positive will have an increased capital burn rate due to rising costs. There is also likely to be increased competition for investor interest making capital raising even harder.

In an economic environment of stagflation like the one that is unfolding currently, it is even more critical that management deliver for their investors. Unfortunately, that’s often easier said than done. Management can only do so much when faced with factors beyond their control. There is only one option, focus on the areas that can be controlled. One such area is investor relations.

If you’re in need of an expert team who are able to manage your company’s approach to investor relations, contact Investability.