Stagflation in Australia What it Means for Your Home Loan

If the feature article attracted your interest, here’s a deeper dive into stagflation, why it’s so hard to fix and what it means for your finances in 2026.

The policy dilemma at the heart of stagflation

Stagflation creates a nightmare for the Reserve Bank of Australia (RBA) and the government.

	Rate hikes	Rate cuts or fiscal stimulus
Help	Dampen demand and bring inflation down	Boost growth and jobs
Harm	Slow growth further and push unemployment higher, deepening stagnation	Risk entrenching inflation, especially when driven by supply shocks such as oil

In a normal recession, inflation falls as demand drops. In stagflation, inflation remains ‘stubbornly entrenched’ even as growth falters, making it harder for policymakers to choose the right tool.

Today, the RBA is independent with a clear 2-3% inflation target, and is a key difference from the 1970s. However, with inflation at 3.7% and little spare capacity, the margin for error is narrow.

How stagflation hits borrowers

For mortgage holders, stagflation is particularly painful:

• your repayments may stay high or increase if the RBA keeps rates elevated to fight inflation,

• real income could stagnate while prices rise, squeezing your ability to service debt,

• the choice between fixed and variable rates becomes critical:

  • fixed locks in payments

  • variable can rise with rates.

If you’re stretching to service a loan, this environment can quickly become unmanageable without early intervention and a clear strategy.

What business owners face

For small and medium businesses:

• rising energy and transport costs squeeze margins,

• input costs for materials, fuel and logistics increase, and

• customers become more price sensitive as their real incomes fall.

  
  

Hedging energy exposure where possible and reviewing pricing strategies can help maintain profitability.

Could Australia avoid stagflation this time?

There are reasons for caution, however not panic:

• the RBA is independent with a clear mandate to return inflation to 2-3%, unlike in the 1970s,

• inflation at 3.7% is far below the 1970s peaks of 10-17.5%, giving more room to manage without uncontrollable inflation spirals, and

• the labour market remains resilient, with unemployment around 4.3% and only recent signs of potential weakness.

However, HSBC warns Australia is ‘less well placed’ than many peers because inflation is already above target and there’s little spare capacity. Any further oil price shock could quickly tip us into a more painful stagflationary period.

What you can do now

Here’s what to consider:

• Review your loan structure

Look at offset accounts, redraw facilities and your mix

of fixed vs variable rates.

• Stress test your budget

Assume rates stay higher for longer and your real income doesn’t grow. Can you still meet repayments comfortably?

• Obtain help early

If you’re stretching to service a loan, talk to us before cash flow becomes critical. Early intervention often means more options.

Contact the office

If you’re worried about your mortgage, loan structure or how stagflation might affect your finance plans, reach out and we can walk through your specific situation and research practical options tailored to your circumstances.

If you'd like help with assessing your personal and financial situation, as well as comparing the loans in the market to see if you're truly getting the right deal for you, then call Bob Malpass now on 0431 862 136, email bob@westhomeloans.com.au