Comment: Spectre of stagflation haunts UK economy

Martin Flanagan
Martin Flanagan
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INFLATION marked time at 2.8 per cent in March, still above the Bank of England’s medium-term target, and most of the signs suggest that it is likely to stay at least these levels for some time to come.

Indeed, there is a growing band of City economists who think that inflation could hit 3 to 3.5 per cent in the coming months.

If there were no other factors pushing up the consumer price index (CPI), we have the incoming BoE’s governor Mark Carney’s implicit extended remit of promoting growth.

That will create a new mood music as the central bank’s monetary policy committee (MPC) goes about its inflation-watch deliberations. Trade-offs between price control and growth in an austerity-hobbled Britain could become the new reality.

More tangibly, sterling has lost value against the dollar and other major currencies since the start of 2013. That is good for exporters, but the pound’s depreciation has lifted the price of oil and gas imports into Britain, contributing to a rising CPI.

And while transportation costs are heading broadly the right way in the subsets of inflation, that extra cost of energy imports could well hike transport costs as the year goes on. The latest figures show transport prices climbed 1.7 per cent over the year to March 2013.

However, higher inflation, which kicked in from last autumn and is proving stubborn, carries two dangers. Much has been written about how pensioners have been particularly battered by historically low interest rates on their savings, the value of which have been further undermined by inflation.

Second, persistently high inflation could discourage consumers generally from spending, especially as job insecurity is set to keeps earnings growth subdued.

The not entirely fanciful prospect, then, is of a possbile scary return of 1970s-type “stagflation”, a toxic economic cocktail of stagnant output and rising prices.

We are some way off that grim outcome. But the longer above-target inflation persists, the stronger the spectre of stagflation will loom.

Glut shows that all that glisters is not gold

GOLD is supposed to be a safe haven in uncertain times such as those we are enduring. But traders are departing from the script.

Gold prices steadied yesterday, but only after the steepest two-day fall since the early 1980s. A strange panic-selling has set in, with gold now about $1,350 an ounce. It is down 25 per cent from its $1,921 peak in September 2011.

So what’s going on? The market has been spooked by a confluence of negative concerns. One is the latest weaker-than-expected economic figures from China, the country that is the talisman of market bulls. Second, there is the concern that that the US Federal Reserve may be close to calling time on its quantitative easing (QE) programme.

Critics claim the side-effect of QE is to fuel inflation, and gold is traditionally seen as a hedge against that. So if further QE in America is off the table, one of the metal’s chief hedging attractions is seen as less necessary.

There are also market concerns that some bigger cash-strapped eurozone countries may be drawn into the fate possibly facing dead-economy-walking Cyprus, and have to sell off some of their gold reserves to pay down their debts a la Gordon Brown in the fag-end days of the last Labour administration.

And any gold glut would further drive down prices.