It’s a word I haven’t come across much since ‘A’ Level economics many moons ago. But money journalists have been blowing the dust off their financial disctionaries and digging out a word which was last doing the rounds in the 1970s … the dog days of the UK economy, before Margaret Thatcher (for good or ill depending on your political persuasion) came and put a rocket up things. So what does stagflation mean?
Stagflation … an ugly word for an ugly combination of events. It’s a conflation of stagnation and inflation and it’s defined thus: a period of slow economic growth and relatively high unemployment (stagnation), accompanied by a rise in prices (inflation). In short, stagflation happens when the economy isn’t growing but prices are – our last nasty bout accompanied the surge in oil prices in the 1970s. Usually, price inflation is an impetus to growth – producers can charge more for their goods so they will borrow money (expensive though interest rates may be) to invest in production. That means more goods, more jobs, higher wages (because labour is in demand) and so on … everyone in theory is happy.
The nix on it in 2008 is the credit crunch. A shortage of credit, with banks unwilling to lend to each other, and a general lack of confidence pervading the markets (be they investment markets, housing markets or whatever), and the personal credit problems of we the consumers. We’re worried our houses are falling in value, worried we’ll get into negative equity, worried we might lose our jobs and generally lacking the will to go out and splurge on luxury goods. The fact that it’s become tougher for us to get credit and loans, and more expensive when we do, leads us to spend even less in the shops of course. Net result, stagnation in demand and economic activity but not, unfortunately, inflation. Prices continue to rise – this week the Bank of England unveiled inflation figures that shocked the City, hitting 3% and with Governor Mervyn King warning that it was likely to hit 3.6% by late in the year – and this as growth slowed to just 1%, half that of a year ago. And while we may shed few tears that estate agents and City brokers are being laid off wholesale, the poison is beginning to trickle into the wider economy. Britain is largely an economy based on services, leisure, tourism and the like these days – if we’re not shopping then UK Ltd will soon start shedding jobs as price inflation creeps inexorably toward 4% … sounds like stagflation to us. You can read more about the Bank of England interest rate cuts here.
Tags: Stagflation
