Achieving the stagflation double
The UK coalition government can be thankful for five year parliaments for it looks like achieving the stagflation double in its first year – rising inflation combined with a fall in gross domestic product. The signs for the economy certainly do not look good. The official measure of annual inflation hit 3.7pc in December, well above the Bank of England’s 2pc target rate and economists at Deutsche Bank forecast that inflation will come in at 4.1pc for 2011 as a whole, which would be the highest reading for a full year since 1992. Now today the Office for National Statistics has reported that gross domestic product fell 0.5pc in the fourth quarter, the most in more than a year. And the negative impact of increased VAT taxes on inflation and consumer spending are just beginning to be felt.
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Stagflation is defined as high inflation and high unemployment coinciding, and was particularly notable as a condition for violating the Keynesian macroeconomic trade off between the two. While falling GDP might be linked to increasing/high unemployment, they aren’t substitutable for each other…