Category: Stock Market

The Cleanaway Waste Management Ltd (ASX: CWY) share price is in focus today as the company unveiled a refreshed 2026 strategy, aiming for margin expansion and stable cash flow, while highlighting a 60% lift in underlying EBIT since FY22.

What did Cleanaway Waste Management report?

• Underlying EBIT rose 60% between FY22 and FY25, with margin expanding 260 basis points to 12.5%
• Return on capital employed improved by 220 basis points to 9.1% from FY22 to FY25
• EBIT margin reached a record 12.5% in FY25
• Free cash flow is expected to strengthen from FY27 onwards as one-off costs wind down
• Dividend payout ratio maintained at 50–75% of underlying NPAT

What else do investors need to know?

Cleanaway’s new “Blueprint 2030 2.0” strategy is built around three pillars: delivering customer value, optimising its branch network, and leveraging advanced ways of working through digital and data capabilities. Management outlined plans to focus on high-value revenue growth, tighter cost controls, and further investment in automation and analytics to drive efficiencies.

Key highlights include a major upgrade to sales processes, with a centralised “One Sales Engine” model designed to lift customer retention and cross-sell rates. The company also flagged its ongoing digitisation program, targeting improved fleet utilisation, real-time tracking, and safety enhancements.

Cleanaway is actively reshaping its hazardous waste business, streamlining its site network while expanding high-margin technical services and decommissioning work—sectors where industry growth is forecast to continue.

What’s next for Cleanaway Waste Management?

Looking ahead, Cleanaway is targeting ongoing margin expansion of at least 260 basis points and 10–15% EPS growth in FY27 as cost-saving initiatives gain traction. The company expects to deliver stronger, more stable free cash flow through disciplined capital allocation and optimised asset utilisation.

Management is confident its integrated network and planned technology investments will continue to underpin Cleanaway’s leadership in sustainable waste management, providing a pathway for profitable growth in critical sectors such as hazardous waste and technical services.

Cleanaway Waste Management share price snapshot

Over the past 12 months, Cleanaway shares have declined 9%, trailing the S&P/ASX 200 Index (ASX: XJO) which has risen 15% over the same period.

View Original Announcement

The post Cleanaway Waste Management shares in focus as strategy refresh targets margin growth appeared first on The Motley Fool Australia.

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Motley Fool contributor Laura Stewart has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. This article was prepared with the assistance of Large Language Model (LLM) tools for the initial summary of the company announcement. Any content assisted by AI is subject to our robust human-in-the-loop quality control framework, involving thorough review, substantial editing, and fact-checking by our experienced writers and editors holding appropriate credentials. The Motley Fool Australia stands behind the work of our editorial team and takes ultimate responsibility for the content published by The Motley Fool Australia.

ASX financials stock Netwealth Group Ltd (ASX: NWL) is starting to win back investor attention after a rough stretch.

The ASX financials stock has jumped 20% over the past month, a sharp turnaround after a difficult period that saw it fall 23% over the past six months.

The recent rebound suggests confidence is returning, with investors warming again to Netwealth’s ability to keep attracting adviser and client funds, even in volatile market conditions.

So, what’s behind the renewed optimism?

Netwealth operates an investment platform that allows financial advisers to manage client portfolios, superannuation, and wealth accounts in one place. In simple terms, the $6 billion ASX financial stock sits at the centre of adviser-client relationships, providing the infrastructure that powers modern wealth management.

That positioning is a major strength. Once advisers and their clients are onboarded, they tend to stick around. Switching platforms can be complex and disruptive, which gives Netwealth strong customer retention and a steady stream of recurring revenue.

Its latest quarterly update reinforced that strength. The company reported funds under administration (FUA) of $125.8 billion, up 20.9% on the prior corresponding period. Importantly, this growth isn’t just being driven by rising markets. Netwealth also continues to win adviser market share, highlighting the competitiveness of its platform.

Stable margins, predictable cash flow

Growth is one thing, but profitability is where this ASX financials stock really stands out. Netwealth benefits from a recurring fee model, high adviser retention, and a sticky client base. That combination supports stable margins and predictable cash flow. Attributes that long-term investors tend to value highly.

It’s a model designed to compound steadily over time rather than rely on short-term bursts of performance. That strength is also flowing through to shareholders. Netwealth recently lifted its interim dividend by around 20%, reinforcing its appeal as a reliable income and growth hybrid.

Innovation is key

Of course, there are risks to consider. Competition in the platform space is intense, with rivals constantly pushing on fees and features.

Pricing pressure is an ongoing challenge, and maintaining a technological edge requires continuous investment. Fall behind on innovation, and market share gains can quickly reverse.

It’s also worth noting that while Netwealth has strong growth credentials, the ASX financials stock tends to trade at more conservative valuations than some high-flying tech names. That can limit upside during market rallies, but it also reflects a more measured, consistent growth profile.

What do the experts think?

According to TradingView data, most brokers rate the ASX financials stock as a buy or strong buy. The average 12-month price target sits at $28.22, implying potential upside of around 11% from current levels. The most bullish forecast sits at $35.40, which suggests a 40% upside at the time of writing.

Bell Potter just retained its buy rating with a $30.00 price target, while Morgans has an accumulate rating and a $29.00 target following the latest quarterly update. That points to a 18% and 14% upside respectively.

The post Experts say this ASX financials stock could soar up to 40% appeared first on The Motley Fool Australia.

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Motley Fool contributor Marc Van Dinther has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Netwealth Group. The Motley Fool Australia has positions in and has recommended Netwealth Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Xero Ltd (ASX: XRO) shares are starting to turn, with momentum building after a period of heavy selling across the tech sector.

The stock is now lifting off recent lows, and the price action is beginning to look more stable.

At the time of writing, the Xero share price is up 1.29% to $83.04. That move comes after the stock hit a multi-year low of $67.93 on 30 March, before rebounding and holding above that level in April.

The shares later came close to that low again, dipping to $69.11 on 13 April, but buyers stepped in before it was retested.

That kind of price action usually points to selling pressure easing.

Here’s what this setup could be telling investors.

Why the sell-off went too far

The weakness over the past year has been very clear. Most of it has been driven by a broader de-rating across global growth stocks, not a change in Xero’s core business.

The company continues to expand its global subscriber base and lift revenue, supported by its position as a leading cloud accounting platform for small businesses.

The platform is deeply embedded in day-to-day operations. Once it is in place, it is difficult to replace, which supports recurring revenue and pricing over time.

There are also signs the cost side is improving. Hiring has slowed, which points to better discipline after a period of investment and should support margins into FY26.

The chart is starting to shift

The technical setup is becoming harder to ignore.

Xero hit a low in late March and has since held above that level. That is normally where things start to change. More recently, the stock has started to push higher, with short-term buying starting to pick up.

This pattern has also been showing up across the sector. Several ASX tech names such as Wisetech Global Ltd (WTC) have rebounded after trading near oversold levels earlier in the year.

What could drive the next leg higher

The macro environment is still creating noise, particularly around geopolitical developments and changing expectations for global growth.

But these conditions tend to move quickly. When sentiment turns, it often turns fast.

If markets begin to stabilise, the focus is likely to return to earnings and growth, where Xero still has clear levers. That includes subscriber expansion, pricing, and further development of its payments and ecosystem strategy.

With the share price still well below previous highs, even a modest improvement in conditions could have a strong impact.

Foolish takeaway

The recent price action suggests the worst of the selling may already be behind Xero shares.

The stock has found a low, held above it, and is now pushing higher, while the broader tech backdrop is starting to improve.

For me, this looks like the early stages of a recovery.

If that trend continues and is supported by Xero’s upcoming results on 14 May, the re-rating could still have further to run.

The post Is the worst over for Xero shares? Here’s what the chart is showing appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended WiseTech Global and Xero. The Motley Fool Australia has positions in and has recommended WiseTech Global and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Do you have room in your income portfolio for some more ASX dividend shares?

If you do, then it could be worth checking out the three shares in this article that have recently been recommended as buys by analysts.

Here’s what they are recommending to clients:

Cedar Woods Properties Limited (ASX: CWP)

The team at Bell Potter thinks Cedar Woods could be an ASX dividend share to buy now.

It is one of Australia’s leading property companies, owning a high-quality portfolio that is diversified by geography, price point, and product type.

Bell Potter believes that this leaves it well-positioned to be a big winner from Australia’s chronic housing shortage.

It also expects this to support fully franked dividends per share of 39 cents in FY 2026 and then 41 cents in FY 2027. Based on its current share price of $7.27, this equates to 5.35% and 5.6% dividend yields, respectively.

The broker has a buy rating and $10.20 price target on its shares.

Charter Hall Retail REIT (ASX: CQR)

Another ASX dividend share that analysts are tipping as a buy is Charter Hall Retail REIT.

It is a property company that owns a diversified portfolio of convenience-based retail centres that are anchored by supermarkets, service stations, and essential services.

These assets tend to be highly defensive. That’s because shoppers continue to spend on groceries and everyday essentials regardless of economic conditions. In addition, it boasts long leases and high-quality tenants, which provide visibility over rental income.

The team at Citi is positive on the company and has a buy rating and $4.50 price target on its shares.

As for dividends, the broker is forecasting dividends per share of 25.5 cents in FY 2026 and then 26 cents in FY 2027. Based on its current share price of $3.86, this would mean dividend yields of 6.75% and 6.7%, respectively.

Premier Investments Ltd (ASX: PMV)

A final ASX dividend share to consider for an income portfolio is Premier Investments.

It is the owner of popular retail brands Smiggle and Peter Alexander, as well as a sizeable stake in appliance manufacturer Breville Group Ltd (ASX: BRG). These assets are consistently generating strong free cash flows, which is usually returned to shareholders in the form of dividends.

Bell Potter is also positive on this one. It expects Premier Investments to pay fully franked dividends of 79.7 cents per share in FY 2026 and then 93.4 cents per share in FY 2027. Based on its current share price of $12.93, this equates to dividend yields of 6.15% and 7.2%, respectively.

The broker currently has a buy rating and $18.00 price target on its shares.

The post 3 excellent ASX dividend shares with 5% to 7% yields to buy appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Charter Hall Retail REIT. The Motley Fool Australia has recommended Premier Investments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

BHP Group Ltd (ASX: BHP) shares are usually a solid choice for passive income and I expect that to continue to be the case. However, it’s not one of the ASX dividend shares that I’d choose to buy today if I were picking a handful.

Part of the reasoning for that caution about the ASX mining share is that, at the time of writing, it has risen more than 50% in the last year. Normally, I like to consider investing in ASX mining shares when there’s weakness surrounding resource demand. That’s not looking like the case with the BHP share price today.

Instead, there are other ASX dividend shares that could be a more consistent and potentially provide more passive income.

L1 Long Short Fund Ltd (ASX: LSF)

This business is a listed investment company (LIC) which usually invests in businesses that have relatively low price/earnings (P/E) ratios. Of all the sectors it has generated returns from, mining shares has been the sector that has generated the most return for the strategy, of around 200%. Industrials and communication services are the other two areas that have generated a return of more than 100%.

The ASX dividend share also has the ability to short-sell shares that it thinks are overvalued, so it can outperform the market even if a lot of shares are going down.

The LIC has a goal to deliver regular dividend growth for shareholders and it pays a dividend each quarter.

At the rate it’s increasing its dividend, it seems likely that the FY26 annual dividend will be approximately 14.6 cents per share, which translates into a grossed-up dividend yield of around 5% at the time of writing, including franking credits.

I think the LIC is more likely than BHP to deliver regular dividend growth each year, compared to the cyclical nature of resource prices.

APA Group (ASX: APA)

APA is a large energy infrastructure business that has a number of compelling assets including a huge national gas pipeline network that supplies half of the country’s gas usage.

The business also owns gas storage, gas processing, gas-powered energy generation, solar farms, wind farms and electricity transmission.

By having a diversified portfolio, it can search for the best opportunities in the energy sector to generate the strongest returns.

The ASX dividend share pays for its distribution from the cash flow of its energy portfolio, with underlying earnings steadily growing over the long-term.

APA has increased its annual distribution every year for the past 20 years, making it one of the most reliable ASX dividend shares around.

With how the business is regularly expanding its portfolio, I think the business still has plenty of growth years of ahead. Energy is an important aspect of Australian life, of course.

It’s expecting to hike its FY26 annual distribution to 58 cents per security, translating into a distribution yield of 5.8%, at the time of writing.

The post Forget BHP shares! Buy these ASX dividend shares instead for passive income appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in L1 Long Short Fund. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Apa Group. The Motley Fool Australia has recommended BHP Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

If I’m looking for passive income from the share market, I would focus on businesses that can generate steady cash flow and return it to shareholders consistently over time.

That would likely lead me toward companies with strong positions in their industries and earnings that can support reliable dividends.

Here are four ASX shares I would look at right now.

BHP Group Ltd (ASX: BHP)

BHP is one of the first names that comes to mind for passive income.

It generates significant cash flow from its large-scale mining operations and that flows through to dividends when conditions are supportive.

I also like the direction the business is heading. Copper is becoming a bigger part of the story, which ties into long-term demand from electrification and infrastructure.

There is also future growth from potash, which could add another layer to earnings over time.

Overall, I think this makes the mining giant a great option for an income portfolio.

Telstra Group Ltd (ASX: TLS)

Telstra is another ASX share that could be a good candidate for a passive income portfolio.

The telco leader operates in an essential industry, with customers relying on its network every day. That creates recurring revenue, which helps support its dividend.

In addition, the business continues to invest in its network, which supports its position and earnings over time.

As a result, I see this as one of the steadier income options on the ASX.

Macquarie Group Ltd (ASX: MQG)

Macquarie adds something different to the mix.

Its earnings come from a range of activities, including asset management, infrastructure, and financial services. That diversification can support income over time, even as different parts of the business move through cycles.

I also like how the company allocates capital. It has a long history of identifying opportunities and building new earnings streams, which can support both growth and dividends.

Coles Group Ltd (ASX: COL)

Coles is a business I associate with consistency.

People continue to spend on groceries regardless of the broader environment, and that helps support steady revenue and earnings.

The company is also busy investing in its supply chain and operations, which can improve efficiency over time.

I think that combination makes it a reliable and defensive option when I’m thinking about income.

Foolish takeaway

If I were building a passive income portfolio, I would focus on businesses that can keep generating cash and returning it to shareholders over time.

These companies each bring something different, but they all have the ability to support income through a range of conditions, which is what I would look for in this part of the market.

The post Where I’d invest on the ASX for passive income right now appeared first on The Motley Fool Australia.

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Motley Fool contributor Grace Alvino has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group. The Motley Fool Australia has positions in and has recommended Macquarie Group and Telstra Group. The Motley Fool Australia has recommended BHP Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

WiseTech Global Ltd (ASX: WTC) shares have been back in the spotlight.

After a strong run, the rally hit a speed bump on Monday, with shares slipping 1.5% to $45.49. But zoom out and the momentum is clear. The tech stock is up 14% over the past five trading days and 9% over the past month, as renewed interest in tech names lifts sentiment.

That said, the bigger picture is more mixed. WiseTech shares remain down 34% year to date and 46% over the past six months.

It’s been a volatile stretch, raising the key question: is this a recovery just getting started, or a bounce that fades?

Mission-critical software

Start with the fundamentals. WiseTech sits at the centre of global trade through its CargoWise platform, used by freight forwarders, customs brokers, and logistics operators around the world. This is not plug-and-play software. Once it’s embedded, it becomes mission-critical to daily operations.

That creates a powerful business model. Customers are unlikely to switch, driving high retention, recurring revenue, and strong pricing power. In software terms, it’s about as “sticky” as it gets.

The broader industry tailwinds only strengthen the case for WiseTech shares. Global supply chains are becoming more complex, more regulated, and increasingly digital. That trend plays directly into WiseTech’s hands, reinforcing its long-term growth runway.

So why have WiseTech shares been under pressure?

The short answer: macro, not micro. The recent decline has largely been driven by external factors rather than any fundamental deterioration in the business. Higher interest rates have weighed on tech valuations, while broader uncertainty has led investors to rotate away from growth stocks like WiseTech shares.

There have also been concerns around artificial intelligence and rising competition, which have impacted sentiment across the sector. Add in geopolitical tensions – particularly around global shipping routes – and anything tied to international trade has faced extra scrutiny.

But none of these factors change how WiseTech’s platform is used or the role it plays in global logistics.

That said, WiseTech shares are not risk-free. Like many high-growth tech companies, WiseTech trades on elevated expectations. Any slowdown in growth or execution misstep could quickly impact the share price. There have also been periods of management-related noise, which can unsettle investors.

What do experts think?

Still, the analyst community remains firmly in the bullish camp.

According to TradingView data, 15 out of 17 analysts rate WiseTech shares as a buy or strong buy, with just two sitting on hold. The average price target is around $78.00, implying potential upside of roughly 72% from current levels.

At the extreme end, the most bullish forecast sits at $121.16, suggesting upside of as much as 166%.

So, is it still a buy?

For long-term investors, the case remains intact. WiseTech is a high-quality, globally relevant software business with strong structural tailwinds. The recent volatility says more about the market than the company itself.

But after a sharp rebound, expect the ride to remain anything but smooth.

The post WiseTech shares are surging again, is it too late to buy now? appeared first on The Motley Fool Australia.

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Motley Fool contributor Marc Van Dinther has positions in WiseTech Global. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended WiseTech Global. The Motley Fool Australia has positions in and has recommended WiseTech Global. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Healthcare is one area of the market I think could be a great place to focus when investing for the long term.

The combination of ageing populations, rising healthcare spending, and ongoing innovation creates a supportive backdrop that can play out over many years. 

With that in mind, here are two ASX healthcare shares that stand out to me right now after falling heavily from their highs.

CSL Ltd (ASX: CSL)

CSL has been through a difficult period, and that has shown up clearly in the biotech giant’s share price.

Although this has been disappointing, I think it is worth sticking with the ASX healthcare share.

Its CSL Behring division remains a global leader in plasma therapies, with demand supported by chronic and rare diseases that require ongoing treatment. That creates a recurring revenue base that can grow over time as patient numbers increase.

There is also a pipeline of products and innovation that can support future growth, alongside the company’s vaccine and specialty pharmaceuticals divisions.

The recent CSL share price weakness has brought valuation multiples back toward levels that look cheap compared to its history. When combined with its positive long-term growth profile, I think that creates a more favourable risk-reward setup.

Over a 5 to 10 year period, I think CSL has the potential to rebuild momentum as execution improves and its growth drivers continue to play out. This could make it a great buy and hold option.

ResMed Inc (ASX: RMD)

ResMed operates in an area that continues to expand globally.

Sleep apnoea remains significantly underdiagnosed, with management estimating that there are over 1 billion sufferers across the world.

But with awareness growing thanks to education and technology, demand for ResMed’s devices and software solutions has been increasing and looks set to continue increasing over the next decade.

ResMed isn’t just selling masks. What stands out to me in is how the company is building an ecosystem.

It combines its hardware with cloud-based software and data insights, which allows it to support patients and healthcare providers across the full treatment journey. That creates a more connected model and strengthens its competitive position.

So, with the ResMed share price well below previous highs, I think the setup looks more compelling from a long-term perspective. This is especially with the combination of structural demand and a strong market position giving it a clear pathway to continue growing.

Foolish takeaway

Looking ahead, I see both of these ASX healthcare shares benefiting from long-term demand and continued innovation.

Their recent share price declines may be disappointing for shareholders, but I think they have created an entry point that looks appealing for buy and hold investors.

Over a five to 10 year timeframe, I think CSL and ResMed shares have the quality and positioning to deliver strong returns and outperform the market.

The post 2 ASX healthcare shares I think can beat the market appeared first on The Motley Fool Australia.

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Motley Fool contributor Grace Alvino has positions in CSL. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended CSL and ResMed. The Motley Fool Australia has positions in and has recommended ResMed. The Motley Fool Australia has recommended CSL. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

When I’m looking for ASX growth shares, I focus on businesses that are still expanding their opportunity and building momentum over time.

That usually leads me toward companies with scalable models, growing markets, and clear pathways to increase revenue. 

With that in mind, here are three ASX growth shares I would look at right now if I had $3,000 to invest.

Netwealth Group Ltd (ASX: NWL)

Netwealth is benefiting from a structural shift in how Australians invest.

More advisers are moving client funds onto platform-based solutions, and Netwealth has been capturing a growing share of that flow. As funds are added to the platform, revenue grows alongside it, creating a base that can continue to expand.

Those funds also tend to stay invested, which supports a more stable and predictable growth profile. Over time, that can create a compounding effect as new inflows build on top of an already growing base.

The business is also continuing to invest in its platform, adding new features and improving functionality for advisers. That helps it remain competitive and positions it well to keep attracting new clients.

DroneShield Ltd (ASX: DRO)

DroneShield is an ASX growth share operating in a market that is still in its early stages.

The increasing use of drones across defence, security, and civilian applications is driving demand for detection and countermeasure technology. As adoption grows, the need for protection systems becomes more important.

DroneShield has been expanding its product offering to meet that demand, with solutions that can be used across a range of environments. This allows it to target multiple markets rather than relying on a single use case.

There is also growing investment from governments and organisations in this area, which can support long-term demand. As awareness and adoption increase, the company has an opportunity to continue scaling its operations.

Block Inc (ASX: XYZ)

Block provides exposure to digital payments and financial services through two interconnected ecosystems.

Square supports businesses with payments and operational tools, while Cash App focuses on consumers. As both sides continue to grow, they reinforce each other, creating a broader and more valuable network.

This structure opens up multiple avenues for growth.

As more merchants use Square, more transactions flow through the system. As Cash App continues to grow its user base, engagement and monetisation opportunities increase. Together, they create a platform that can continue to expand over time.

Block is also moving into additional financial services, including lending and other tools (like Afterpay) that can deepen relationships with users and support further growth.

Foolish takeaway

Over time, growth often comes from businesses that can keep building as their markets expand.

I think these ASX growth shares are positioned in areas where demand is increasing and adoption continues to grow, which makes them interesting when thinking about long-term growth investing.

The post Where I’d invest $3,000 in ASX growth shares now appeared first on The Motley Fool Australia.

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Motley Fool contributor Grace Alvino has positions in DroneShield. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Block, DroneShield, and Netwealth Group and is short shares of DroneShield. The Motley Fool Australia has positions in and has recommended Netwealth Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

I’d wager that if you have come across the term ‘stagflation’, it was sometime in the past seven weeks or so. Before the onset of the Iran war, stagflation was a term that was last bandied about in mainstream economic reporting back in the 1970s. As such, if one isn’t a student of history, or studied economics at high school or university, the term might be completely unfamiliar.

Yet since the beginning of March, you can’t open the business section of a news article without coming across a mention of stagflation.

So today, let’s go over what this rather strange term means.

What is stagflation?

To understand the concept of stagflation we first need to recognise that this term is actually a portmanteau. Put simply, it is a word that has been created by merging two other words. Those two other words are ‘stagnation’ and ‘inflation‘.

When an economy experiences stagflation, it is suffering from high inflation and low, or stagnant, growth, at the same time.

This is actually a rather uncommon economic phenomenon. Under conventional economics, inflation occurs when the economy is running too hot for its own good. There is more money sloshing around than the economy can handle. As such, in lieu of increasing output beyond capability, an economy’s producers begin increasing prices. This cascades through the economy until prices are rising at a dangerous rate.

This inflation is known as ‘demand driven‘. It is easily countered, according to traditional economics anyway, by governments pumping the breaks. This can come in the form of higher taxes, or more commonly higher interest rates from central banks like the Reserve Bank of Australia (RBA).

These higher rates (or taxes) pull money out of the economy and break the cycle of rising prices. The trade-off is cooler economic growth, of course. Under traditional economic models, the trade-off between interest rates and inflation is akin to a see-saw. If one gets to high, all a central bank needs to do is jump on the other side. Balancing this see-saw is what most central banks, including the RBA, have spent the past 50 years doing.

What causes stagflation?

However, this model only works to manage demand-driven inflation. When it comes to supply-side inflation, the rulebook slides into impotence.

The last time the world saw a bout of stagflation was back in the 1970s. It was sparked by, you guessed it, an oil shock.

Back in the ’70s, the OPEC cartel decided to punish the United States and its allies for supporting Israel in the 1973 Yom Kippur War by restricting oil supplies. Oil skyrocketed, sparking rampant inflation throughout much of the world. This inflation was driven by a supply limit of oil, one of the fundamental inputs into most forms of economic activity.

Unlike the inflation we’ve become used to, it was not caused by excessive demand int eh economy. As such, central banks couldn’t just pull the interest rate lever and hike inflation away. Instead, they had to try and manage inflation as best they could, at the real cost of ongoing economic growth. As such, high inflation, held up by increased oil prices, persisted, while economic growth languished. Stagflation, in other words.

Stagflation is often cited as a central bank’s ‘worst nightmare’, because of the lack of easy solutions. Reducing rates will only stoke inflation, while increasing rates will prolong the downturn and increase unemployment.

This problem bedevilled the major economies of the world for years. It was only when OPEC split due to geopolitical tensions and the global oil price came back down in the early 1980s that this supply shock faded. By then, the world had responded to higher oil prices by, for example, diversifying their sources of oil, building more efficient cars and expanding the use of gas and nuclear power. Sure, inflation remained high over that decade. But growth picked up to match it.

Foolish takeaway

Stagflation is an unusual economic phenomenon only experienced a few times in recorded economic history. However, with inflation already uncomfortably in Australia before the Iran war, and a 21st century oil shock a distinct possibility (if it’s not already occurring), it may be a malady that we will once again have to navigate.

Tomorrow, we’ll look at how to position an investing portfolio to account for the possibility of stagflation, so stay tuned for that.

The post RBA’s ‘worst nightmare’: What exactly is stagflation? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.