Stagflation’s lethal cocktail

BRITAIN’S battered economy suffered another blow yesterday as inflation hit record-high levels, raising the spectre for the first time in two decades of stagflation.

This combination of stagnation in the economy, which has barely grown for the last year, and rising inflation mainly imported from abroad through increased fuel prices – although some companies are taking the opportunity to restore their balance sheets by hiking prices – is particularly worrying given the Bank of England and the Government have so few levers to pull to tackle it.

The rise in the consumer prices index to 5.2 per cent will impose another heavy burden on households amid figures last week which revealed earnings are growing at just 1.8 per cent – even though it might offer some help to pensioners and those on benefits as it will be used to calculate next April’s rise in state benefits.

Hide Ad
Hide Ad

This squeeze on incomes, which began when the credit crunch struck and is now reaching levels not seen for 30 years, is a critical problem for the economy, the bulk of which relies on consumer spending.

Combined with the biggest-ever cuts in public spending, it has triggered a dramatic slump in demand as cautious consumers have cut back either by choice or necessity.

Next year inflation may well fall naturally, although it is likely this will due to further cuts in public spending and, most worryingly, another worldwide downturn, partly due to problems in the eurozone.

In the face of this, the Bank of England has announced plans to print more money but Ministers have so far refused to budge from their deficit-cutting Plan A.

Hide Ad
Hide Ad

Blaming Labour and the failure of the eurozone is no substitute for action and it simply will not do.

Chancellor George Osborne must bring forward a detailed plan to stimulate recovery in his autumn statement next month.

It does not have to be a Plan B, it does not have to be a U-turn, but it must signal to consumers, industry and the markets that Britain is open for business.

Otherwise, the economy faces slumping further, with unemployment spiralling upwards towards three million – and the North is bound to be worst hit.

There is still time to act, but that time is fast running out.