Is this the return of stagflation?

As growth slows and prices surge, the economic outlook has echoes of the disastrous 1970s . . . but,

The scene at the Athens Seminar, an annual economic gathering held for the past three decades, was something straight out of Labour's past. Sitting on the end of the platform was Lord Healey, Labour's chancellor of the exchequer at the time of the 1976 sterling crisis, brought back at the ripe age of 90 for this special anniversary. And the main topic of discussion among the international bankers, economists and policymakers was the very 1970s subject of "stagflation".

A year ago, Gordon Brown could scarcely have envisaged that after more than a decade of non-inflationary growth, the most prosperous period in Britain's post-Second World War economic history, stagflation - a word that combines stagnation and inflation - would be back in the headlines. Brown's reform agenda of cutting the Bank of England free from interference by the politicians, together with his strict budgetary rules, was meant to have put paid to boom and bust.

So how did we arrive where we are? It is the result of an unusual chain of circumstances. The credit crunch is finally having an impact on the real economy of growth and jobs. And Britain, with its strong appetite for credit, is particularly vulnerable.

At the consumer level, much of the nation's wealth is tied up in the housing market. As a result of the crunch, mortgage lending has virtually ground to a halt, the price of borrowing has climbed sharply, and the free and easy conditions of much of the past decade have been tightened. The prices of existing housing stock are falling sharply and are down by 10 per cent or more in some areas. New homes have been hit even harder, with sales down 40-50 per cent and price drops of 20 per cent or more being recorded. Many of the major home-builders have halted the diggers and cranes, are rapidly shedding workers and have had their share prices plummet.

As UK consumption revolves around the housing market, this has been reflected on the high street. Leading home-furnishing groups such as Land of Leather and the sofa store chain ScS are reporting disastrous sales. Woolworths is just as deep in the doldrums, and the grocery giant Sainsbury's reports a new phenomenon: top-and-bottom shopping, as customers combine the finest cuts of beef with low-cost pasta.

Crisis? What crisis?

So far, manufacturing has withstood the economic hurricane, aided by the weak pound, which has kept exports competitive. But as the rest of the world slows, the markets for British goods will also stutter. Investment plans are already being cut back because of the paucity of finance.

The consensus view is that, in hard numbers, growth will decline sharply to 1.7 per cent this year and 1.3 per cent in 2009. Britain may avoid recession but the economy will not expand speedily enough to prevent the unemployment rate - which is at unthreatening levels - edging upwards.

In itself, a slowdown after years of buoyant growth would not be disastrous. The fear now, however, is that we face the same difficulty as in the late 1970s and 1980s, of slow growth combined with rising prices. The surge in the oil price to nearly $140 per barrel means that the crisis in energy markets has now exceeded anything seen following the Yom Kippur War of 1973, the Iranian Revolution of 1979 and the first Gulf war of 1990.

We are all feeling the pain through the price of petrol at the pump and surging fuel bills. Wholesale gas prices could rise by as much as 40 per cent this autumn. Add to this the rapidly growing cost of basic foodstuffs such as wheat, milk and rice, and you have an inflation problem.

Measured by the government's favoured consumer prices index (CPI), inflation is now running at 3.3 per cent per annum, way above the Bank of England's target of 2 per cent. The governor of the Bank, Mervyn King, has told the Chancellor he expects prices to rise to at least 4 per cent a year before all this is over. His fear is that high prices will feed into wage deals, creating a vicious circle of inflation.

And yet, despite the panicked headlines about stagflation, this hardly represents the kind of situation that that old-stager Denis Healey recognises. The rise in consumer prices is modest compared to the double-digit inflation of the late 1970s. The disruption caused by a few Shell tanker drivers and museum workers is a mere shadow of the titanic disputes at the docks and among municipal workers 30 years ago. And the slowdown in growth and uptick in unemployment looks benign compared to Britain's past.

Sure, new Labour finds itself in an economic fix. But as the Sun had Jim Callaghan saying on his return from an international summit in the Caribbean in early 1979, "Crisis? What crisis?"

Alex Brummer is City editor of the Daily Mail. His book "The Crunch" will be published by Random House on 3 July (£11.99)

This article first appeared in the 30 June 2008 issue of the New Statesman, Thou shalt not hug