Tony Dolphin looks at today's Bank of England Inflation Report.
Back in the days when stagflation – the combination of high inflation and low growth – was a major problem in many developed economies, economists began tracking something they called the ‘misery index’. This was simply the sum of inflation and the unemployment rate – the higher the index reading the more miserable was the economic conjuncture.
I was reminded of the misery index again while reading Mervyn King’s comments at the media briefing for the latest Bank of England Inflation Report and looking at the Bank’s latest forecasts. The growth forecast has been revised down (suggesting more unemployment) and the inflation forecast has been revised up – probably to reach 5 per cent later this year.
The Governor blamed higher fuel prices for inflation staying well above its target rate during 2011. He could also have said that they were indirectly responsible for lower growth too. Output growth forecasts for 2011 are being revised down largely as a result of lower expectations for consumer spending. These are, in turn, the result of a squeeze on households’ spending power caused by price inflation running well ahead of wage inflation.
Of course, higher fuel prices were also responsible for a surge in inflation and a collapse in economic growth in the 1970s – when the term ‘stagflation’ was first coined. Fortunately, the current situation, at least as far as inflation is concerned, is on a completely different scale from the 1970s experience.
Even so, the misery index is already at a 17-year high and the Bank’s forecasts suggest it is going to move even higher in coming months.
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