Financial slowdown 'to drag on'

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The Independent Online

Mere mention of the word "stagflation" is enough to make economists cower behind the sofa trembling.

Some talk of "the inflatable deer" in hushed tones, as if trying not to jinx the economy by invoking the twin perils of high inflation and economic slowdown.



But with the economy grinding to a halt at a time when the rising cost of living is more than double the Government target, few can now deny the harsher conditions that have descended.



The term "stagflation" - high inflation combined with economic slowdown - was first uttered by Conservative MP Iain Macleod during a Commons debate in 1965.



He spoke of having "the worst of both worlds - not just inflation on the one side or stagnation on the other, but both of them together".



Until then it was generally assumed under the prevailing Keynesian economic theory of the day that both conditions were unlikely to occur at the same time.



That doctrine was completely debunked in the early 1970s when soaring oil prices pushed countries around the globe into recession and led to runaway inflation - peaking in the UK at 24 per cent in 1975.



That crisis provides a classic example of the factors needed to push an economy into stagflation.



Economic theory suggests that the condition can be brought on by one of two things - supply shock or inappropriate monetary policies.



In the case of the early 1970s, supply shock came in the form of oil. It raised prices at the same time as slowing the economy to the point of recession.



Government economic mishandling can come in the shape of overzealous monetary policy. By pumping cash into the system to ward off a recession, policymakers can set off spiralling wage increases and soaring inflation.



Present day Zimbabwe provides a glaring example of how centralised mishandling of the economy can lead to stagflation.



So how bad are things in the UK? Even if inflation, as defined by the consumer price index (cpi), does remain above 4 per cent, it could hardly be described as rampant, or runaway.



Likewise, recession has yet to hit. Growth is down to zero, but for an actual recession to be seen to have taken hold, Britain would have to experience two consecutive months of negative growth.



Nonetheless, compared to the good times of recent years, it does represent a marked slide in fortunes.



Mervyn King's NICE decade (non-inflationary continual expansion) lasted from 1997 to 2007. It is now over - the global credit crunch has seen to that.



Moreover, it is argued that official figures are masking the true gravity of the situation.



CPI hit 4.4 per cent in July - above the 2 per cent target, but way below other inflation indicators. The Retail Price Index (RPI), which includes housing costs, hit 5 per cent.



Food prices, energy bills and petrol are rising at an even faster rate - causing real pain for consumers.



Justin Urquhart Stewart, of Seven Investment Management, said "We are already having stagflation - inflation with a stagnating economy is already here.



He added; "We are looking at a period of about a year. This time next year there may be green shoots."

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