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The Writing on the Wall: Stagflation to Hit the UK Once More?
Posted on January 25, 2011 by pilkingtonphil
The UK economy has seen better days...
GDP figures are in for the UK in the final quarter of last year – and they’re bad… very bad. GDP shrank by 0.5%.
While the actual contraction seems to have been caused by the terrible weather, there is a general consensus that even if weather conditions had been normal, the economy probably wouldn’t have shown any growth.
So far, so bad – but now consider the fact that inflation has continued to climb; with the CPI (Consumer Price Index) moving up from 3.3% in November to 3.7% in December. That’s a pretty significant increase – especially for an economy showing negative GDP growth.
After the release of this data, many commentators are voicing their concerns that the UK might once again be facing ‘stagflation’.
Britain first fell into stagflation in the 1970s. That era was characterised by low-rates of economic growth and high-rates of unemployment, coupled with persistent inflation.
Some say that this circumstance cannot be accounted for in economic theory – this is nonsense; there are plenty of reasons why this might happen. In the 1970s the predominant causes were wage-gains by workers and the oil shocks – most notably the shock that occurred in 1973 when the US moved to supply the Israelis in the Yom-Kippur War. In response many Arab states waged economic war against Whitey, by raising the prices of oil dramatically.
The latter – the oils shocks – are generally referred to by economists as ‘exogenous’ or ‘external’ shocks – as in, much like the weather affecting the UK’s current economic growth, they come from ‘outside’ the economy at large. The former – the wage-gains by workers – however, were ‘endogenous’ or ‘internal’ to the economy at large.
Thus, the oil shocks passed – and high wages were tackled by the Thatcher government using the money supply to create large-scale unemployment; ending the inflationary crisis, while simultaneously destroying British industry. Tough medicine – to say the least.
Today, however, we’re in an altogether different situation. Rising prices simply shouldn’t be happening. Why? Well, we’re not seeing high-wages as a root cause. Add to this the fact that, with unemployment rising, spending by households has been taking persistent knocks.
So, what the hell is causing the inflation? Well, I’ve said it before: its a combination of bad weather adding to the cost of food and energy – coupled with that ever important factor of speculators making bets on these increases and thus pushing prices ever higher.
But the British government continue to look to the old solution of ‘slash and burn’ – indeed, the government expects that inflation will come down when they make their vicious cuts to public spending over the next two years.
Will this work? I’d guess not. We’ll probably see inflation come down a little as the weather eases up. But the speculators – flush with cash from the US government’s QE2 project – will continue to bet on the essentials of life, pushing up their prices and causing inflation.
All the Cameron governments’ cuts will achieve is more misery. As unemployment persists in the UK, the cuts will drag down incomes – but with Wall Street and The City continuing to push up prices, people will find it more and more difficult to afford the costs of living.
Dark days are on the horizon.