bookmark_borderPrice inflation, wage inflation and stagflation



inflation …
Originally uploaded by Ferdinand Reus

A few recent articles have suggested that the UK is entering stagflation. (For a definition of the term, see Wikipedia.)

I’m not actually disputing this, but the only real experience this part of the world has had of stagflation was the 1970s, when both price inflation and wage inflation were very high.

This time, inflation is not actually that high (between 3 and 5 percent depending on the measure used), but the problem is that wage inflation is so low. I’m aware that National Statistics think wage inflation (or earnings growth, as they call it) is around 2%, but my gut feeling is that this figure is as high as it is because of investment bankers or similar – most people I know have been on pay freezes or minimal pay rises for the past two years.

This means that most people are almost 5% worse off every single year. That’s the kind of figure you can live with for a year or two, but if it becomes engrained, it’s going to cause real pain.

This situation – price increases outpacing pay increases year after year – could in theory continue without the economy slumping back into recession, so long as unemployment is high enough to scare workers into submission.

So should we call this stagflation, or would it be better to come up with a new term?