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Stagflation may be here but please, keep it quiet

Oh happy days. As the price of the things we need increases we are being left with less to spend on the things we want.

In effect, the 5.2% increase in the Consumer Price Index means we're taking a pay cut unless we can talk our way to an above-inflation pay rise, something which isn't likely in the current shaky economic environment.

So our spend on 'luxury' items falls and our spend on essentials becomes more picky, putting pressure on retailers and manufacturers and, in effect, propagating further gloom along the economic cycle.

If further proof of this were needed, look no further than the Misery Index, that jauntily titled measure of how happy we are. It's derived from adding together the unemployment rate and the inflation rate and is currently at its high level since the aftermath of Black Wednesday in 1992.

In fact, whisper it quietly but we might just be suffering from stagflation, a condition which sends shivers down the spines of business owners everywhere. It occurs when we have a situation of low growth, high inflation and high unemployment, three conditions which sum up the current state of affairs very succinctly.

And here's where the Bank of England's policy comes to a sticky juncture. Under normal circumstances, these pages would be filled with expectations from the men and women in the know of an imminent hike in interest rates, the central bank's normal weapon of choice when faced with the enemy of inflation.

But hiking interest rates now, when consumers and businesses are already struggling to cope under a wave of price hikes and a slowing economy, would be adding one burden too many and gross domestic product would slow further.

Thankfully for the bank, the experts expect inflation to fall back to the 2% target over the next few months as the market forces of the latest price hikes take hold but it does look as if it's going to be a difficult winter.

Energy was said to be behind much of the rise in last month's inflation hike and that coincides with a couple of days when the temperature has dipped enough to make even the most hardy soul think about turning the heating on. Pricing a tank of heating oil recently has been an eye opener, to say the least.

But it's only been a surprise because the price of crude oil has come down and, if you look at other commodity markets, the price of other staples such as sugar, wheat and coffee have also slid over the last few months. That's another reason why the experts reckon inflation will fall in the coming months; it just takes a while for the slide in commodity prices to filter through to the prices you and I pay at the till.


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