News from British and Canadian Conservatives

Tuesday, May 13, 2008

Stagflation: Coming to a high street near you

Today saw a dramatic increase in the UK's inflation rate. It's certainly not anything like the hyper-inflation we saw in the dying days of the last Labour administration, when inflation topped 25%, but it's still quite high enough. RPI rose from 3.8% last month to 4.2% in April. Even the government's own dodgy-but-preferred CPI, which includes necessities like HDTVs but excludes luxuries like a roof over your head, rose from 2.5% to 3%. A significant chunk of the increase was down to recent inflation-busting tax rises.

The figures were worse than pretty much anyone expected. They suggest that the inflation genie is creeping back out of the bottle at a time when the Bank of England has few tools to tackle it. Economic stagnation and the Credit Crunch mean that the interest rate increase which would normally be required to control rising inflation could be enough to tip the economy into recession. Poor fiscal planning over the last decade is largely to blame. Britain piled up massive deficits during the good years, while countries like Canada sensibly built up budget surplusses and paid down government debt. Now we have an economy which has been artificially stimulated beyond its limits, and there's nothing left to carry out the essential repairs.

So, could stagflation really rear its ugly head? I fear that it could. In recent years, inflationary pressures have been kept low by cheap imports from the newly industrialised world. China and India, with a combined population approaching 2,500,000,000, roughly 40% of the world's total, have been pumping out cheap goods for the world to lap up. Supply has been rapidly increasing, keeping pricees down.

Now it's payback time.

As the people in those countries have now begun to grow wealthier, they are able to afford to buy goods which were previously unobtainable luxuries. Consumerism has been rife in the west for decades, but now it's taking hold in many parts of Asia. As the Chinese and Indians are able to afford more food. As they demand more electricity for their new gadgets. As they require more fuel for the increasing number of cars. It's inevitable that demand will now rise faster than supply, increasing prices of goods as diverse as oil and rice, grain and jumbo jets. As prices rise, so will incomes in the far east, where salaries start to catch up with those westerners receive. The same won't be true in the west, where our economies aren't growing enough to pay for salary increases and price rises could cause real-terms shrinkage in incomes.

It's time to tighten your belt and hold on for the ride. Things can only get worse.

There are countries which have prepared. Most have prepared better than Britain. Across Europe, countries like Germany, Sweden and France have embarked upon economic and fiscal reforms. They have shown restraint and cut tax as a share of GDP. Britain has done the opposite. Other countries, like Norway and Canada will benefit from their vast reserves of oil and gas, which are rapidly rising in value as the far east demands ever more of the precious black gold, ofsetting the decline in manufacturing. That's why the falling house prices in Alberta are a temporary blip and nothing to worry about. It's Ontarians who need to be worried for the future.

Will there actually be stagflation? It's a worst case scenario and it might not happen. I wouldn't want to bet on it though.

One thing could save many countries from a very rocky time - environmental developments. As fossil fuels become more expensive, investment in renewables and other green technologies will become increasingly economically viable. We could very well see such technological advances that enviromentalists will have to find another cause to campaign on, as renewable energies and more efficient goods reduce dependence on carbon. However, if we want to avoid famine we might have to give up on the bio-fuel dream, which is taking so much land out of the food chain.

UPDATE: 2250 - Seems that the Independent and I are having the same thoughts this evening. Must be a first!

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