What is stagflation?

We ought to fear the "Spectre of stagflation", says the <em>FT</em>.

The Financial Times' lead story today highlights the "spectre of stagflation", the economic phenomenon where inflation spikes even as growth stays flat.

David Keohane and Claire Jones write:

Inflation expectations, as measured by the difference between nominal and inflation-linked bond yields, ticked up to near 3.3 per cent on Tuesday, levels not seen since September 2008.

Investor fears that the UK could be simultaneously hit by stagnant growth and high inflation, as experienced in the 1970s, were exacerbated by poor economic data pointing to the probability of another economic contraction in the first quarter of this year.

Stagflation—a portmanteau of "stagnation" and "inflation", if that's not clear—is one of the major fears in orthodox economics, because the two phenomena are usually viewed as a trade-off. Central bankers put up with higher inflation expectations to boost low growth, and vice versa; if growth is low and inflation high, those policy levers lose their effectiveness. Ultimately, the fear is that stagflation will be locked in in the long term.

The last serious stretch of stagflation was in the 1970s, and is largely credited with leading to the current inflation-averse international monetary regime. In Britain and the US, inflation expectations had ticked steadily upwards, thanks, in part, to the over-effectiveness of centralised bargaining over pay. The common story told is that, as unions began to demand above-inflation pay rises, they were granted frequently enough that the demands themselves increased the rate of inflation. The annual rate of change in RPI peaked in August 1975 at an astonishing 26.9 per cent.

This time round, inflation expectations are being raised by the actions of the Bank of England—albeit to nowhere near the same extent. Nonetheless, the Bank, having expressed a belief that inflation oughtn't come down until after the economy picks up, is responsible for the fact that expectations have hit the pre-crisis peak.

The fears of stagflation are currently just that—fear hasn't turned into reality yet—but, as with so many economic phenomena, it has a nasty tendency to become a self-fulfilling prophecy. Hopefully, the underlying pattern of growth will turn from stagnation eventually, before inflation expectations get calcified at 3+ per cent; but if it doesn't, and the Bank of England is forced to keep inflation high in the face of the continued corrugated economy, we could see the current situation become the new normal.

Inflation. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
Show Hide image

The buck doesn't stop with Grant Shapps - and probably shouldn't stop with Lord Feldman, either

The question of "who knew what, and when?" shouldn't stop with the Conservative peer.

If Grant Shapps’ enforced resignation as a minister was intended to draw a line under the Mark Clarke affair, it has had the reverse effect. Attention is now shifting to Lord Feldman, who was joint chair during Shapps’  tenure at the top of CCHQ.  It is not just the allegations of sexual harrassment, bullying, and extortion against Mark Clarke, but the question of who knew what, and when.

Although Shapps’ resignation letter says that “the buck” stops with him, his allies are privately furious at his de facto sacking, and they are pointing the finger at Feldman. They point out that not only was Feldman the senior partner on paper, but when the rewards for the unexpected election victory were handed out, it was Feldman who was held up as the key man, while Shapps was given what they see as a relatively lowly position in the Department for International Development.  Yet Feldman is still in post while Shapps was effectively forced out by David Cameron. Once again, says one, “the PM’s mates are protected, the rest of us shafted”.

As Simon Walters reports in this morning’s Mail on Sunday, the focus is turning onto Feldman, while Paul Goodman, the editor of the influential grassroots website ConservativeHome has piled further pressure on the peer by calling for him to go.

But even Feldman’s resignation is unlikely to be the end of the matter. Although the scope of the allegations against Clarke were unknown to many, questions about his behaviour were widespread, and fears about the conduct of elections in the party’s youth wing are also longstanding. Shortly after the 2010 election, Conservative student activists told me they’d cheered when Sadiq Khan defeated Clarke in Tooting, while a group of Conservative staffers were said to be part of the “Six per cent club” – they wanted a swing big enough for a Tory majority, but too small for Clarke to win his seat. The viciousness of Conservative Future’s internal elections is sufficiently well-known, meanwhile, to be a repeated refrain among defenders of the notoriously opaque democratic process in Labour Students, with supporters of a one member one vote system asked if they would risk elections as vicious as those in their Tory equivalent.

Just as it seems unlikely that Feldman remained ignorant of allegations against Clarke if Shapps knew, it feels untenable to argue that Clarke’s defeat could be cheered by both student Conservatives and Tory staffers and the unpleasantness of the party’s internal election sufficiently well-known by its opponents, without coming across the desk of Conservative politicians above even the chair of CCHQ’s paygrade.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.