The Spectre of Stagflation

Rather a gloomy front page for the Independent this morning which looks more like an advert for the latest Gothic movie.

In fact the paper is alerting us to the Spector of Stagflation.For those with shrt memories this is the joint appearance of high inflation and low growth.

Its economics editor,Sean O'Grady writes

A combination of stagnant output and high inflation not seen for decades is set to haunt policy makers for months if not years to come.

He points out the following

1. that the jump, from 2.5 per cent last month, is the most dramatic since 2002,
2. that unusually it is not a broad rise but
3. Food is 7.2 per cent up on a year ago, with analysts expecting 10 per cent inflation in a few months. And it's the essentials that are up the most – bread by 13 per cent, butter by 32. 2 per cent and eggs by a third. The increase in food prices is the fastest since 1990.
4. The twin effects of the credit crunch and the commodities crunch have sucked purchasing power out of the economy while increasing the cost of housing, food, energy and almost everything else
5. The 15 per cent decline in the value of sterling – as steep as when the pound was forced out of the ERM on "Black Wednesday" in 1992 – has exacerbated inflationary pressures. The fall is hitting living standards, especially for pensioners and the poorest

But more worryingly the Bank of England's policy is flawed

Matters are made more complicated because the Bank's "policy rate" is almost irrelevant when market interest rates remain stubbornly high, thanks to the credit crunch. Almost as fast as the Bank of England has been reducing rates the commercial lenders have been raising them and putting up their fees for arranging a mortgage, cutting the flow of funds into the housing market by a half.