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Stagflation? Can Someone Explain?

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Keep hearing the word but no-one seems to describe it in lamen terms. Is it possible for someone to stick down a quick meaning of the word - Stagflation!

As I understand it - Stagnation (of the economy) + inflation = stagflation. It means that the economy is up effluent creek without a paddle.

The BOE needs to raise interest to stem the run-away inflation, but at the same time it needs to cut rates to stimulate the economy.

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Traditional economic theory says there's a link between inflation and unemployment: when one goes up the other goes down (The 'Phillips Curve').

Under stagflation, inflation and unemployment both go up.

It means that policymakers' hands are tied because they can't reduce interest rates to stave off unemployment, because it will only exacerbate the rising inflation.

The 1970s was the last big stagflationary period in the UK.

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Stagflation can't be here forever, what happens next?

High interest rates, a serious recession and lots of lefty whining about unemployment, if I remember correctly.

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From..... http://www.hemscott.com/

Hemscott summary

Ghosts, when exorcised, are supposed to do the decent thing and clear off for good. Political ghosts, on the other hand, have a nasty habit of reappearing without warning and when they do they tend to stick around for quite a while.

The ghost of stagflation, which haunted Harold Wilson’s government in the 1970s, could be lurking round the corner. As with real ghosts, you get occasional sightings by the credulous that are dismissed scornfully by the sceptics who don’t believe in this sort of thing. However, there is a chill in the air.

Younger investors can be forgiven for asking: ‘Stagflation? Never heard of it.’ Indeed, despite living through the phenomenon, I had myself come to assume that it would not happen again in my lifetime. But the soaring fuel prices that did so much to stoke the troubles of the seventies are here again, and so is the other ingredient, soaring government spending.

Stagnation is a portmanteau word, an odd combination of stagnation and inflation, and the phenomenon is hard to get rid of. Wilson’s two governments, in the sixties and seventies, had promised the end of another ghost, the stop-go policies of the previous Conservative governments. Under stop-go, credit became plentiful and taxes were lowered when the economy faltered, and the opposite policies were followed if the economy started to race away.

Wilson’s argument was that he could iron out the cycle and produce slower but sustainable growth without the pain of periodic braking. What we eventually got was stagflation. And when the economy stagnated, the tried and trusted cure of pouring in money would no longer work, as we already had rampant inflation.

History never repeats itself exactly, since time marches on. In particular, the power of trade unions was severely curtailed by Margaret Thatcher, who seized the opportunity presented by a nation tired of stagflation. Heavy wage demands, like stagflation, have come to be seen as a ghost of the past. They, too, could return some day.

Inflation itself, or at least the threat thereof, is certainly back with us thanks in large part to fuel costing £1 a litre or thereabouts. The Bank of England’s rate setting committee, using 2.5% as its target as measured by the retail price index, kept inflation on the bottom side for years, so much so that 2.5% came to be regarded erroneously as the ceiling rather than the intended mid point.

Chancellor Gordon Brown’s decision to switch to the consumer price index, which had run consistently at lower levels than the RPI, and to lower the target to 2%, looks to have been a piece of comically bad timing. The CPI, which excludes housing costs, is now higher than the RPI, which has sunk back with the end of the latest housing boom.

This week the CPI rose to 2.4% and there is a realistic possibility that it will edge on to 3%, at which point the Governor of the Bank of England will have to write to the Chancellor explaining how such an outrage could occur.

Some economists are taking comfort from the fact that inflation is being distorted by energy prices. Core inflation, the argument goes, actually dropped last month and stands at 1.8%. Core inflation excludes energy and seasonal foods. This argument is a little like saying: ‘My bank account is fine if you ignore all the cheques I write.’

Energy, in the form of petrol, diesel, gas or electricity, is not only a key component of the cost of living. It is also a key component in producing goods and services, the cost of which will inevitably be passed on to consumers or, worse still, will lead to companies going bust.

It may be that petrol prices will come down and the inflation rate will follow. There is as yet no genuine sign of this happening and to add to the general discomfort, British Gas is planning to raise prices in line with increases from Powergen.

Another worrying factor is that the supply of money in the UK economy is growing rapidly. M4, the wide definition of money, is expending at 11%.

It is possible that Brown will bow to pressure and cut duty on petrol. He is, however, better prepared for fuel demonstrations this time round and will not want the ignominy of backing down for a second time. Besides, the revenue from motoring’s various taxes is crucial at a time when he will have increasing difficulty in meeting government spending without breaking his golden rule of balancing the day-to-day budget across the lifetime of the economic cycle.

The spectre of stagflation will not, however, necessarily be bad for shares, so it is no surprise that the stockmarket is holding up so well. If money starts to lose value rapidly, then shares become more attractive as a hedge, even if company earnings suffer initially.

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I'd like to know more about this.

Stagflation can't be here forever, what happens next?

this is simplistic but here goes



productivity increases and money supply stays the same. more goods are being bought with the same money hence prices go down

eg DVD recorders , computers, tvs etc


productivity stays the same and money supply goes down . there is less money to buy the same amount of goods hence prices go down

eg houses :-)


increased money supply leads to increased productivity and increased wealth ao people can afford to pay more for the goods they are producing

eg cars


the money supply goes down (or stays the same ) and the amount of goods being produced goes down even faster. general recession. productivity is down and unemployment is up. there is the same money (or maybe slightly less) chasing fewer and fewer goods so prices rocket

eg wartime shortages causing inflated prices for luxury items

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Political ghosts, on the other hand, have a nasty habit of reappearing without warning and when they do they tend to stick around for quite a while.

I thought they got given ludicrously highly paid jobs as EU Commissioners - an awful lot of money IMPO for someone who holds doors open! :blink:

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