Think you’ve got stagflation? Check out the U.K.
Inflation hit 4.5% in April, the government said Tuesday, up from 4% in March. Year-over-year price increases are on their way to 5% this summer, according to official forecasts.
Yet there is no rush at the Bank of England to raise interest rates, with the economy spinning its wheels. The U.K. economy contracted in the fourth quarter and barely expanded in the first, as the effects of the government’s belt-tightening hammered spending and pushed up prices via higher taxes.
“It is now clear that underlying activity growth slowed markedly around the turn of the year,” BoE governor Mervyn King said last week. “Looking through the volatility associated with heavy snow last December, the level of output appears to have been broadly flat over the past two quarters, and remains about 4% below its peak prior to the crisis.”
So for now U.K. consumers, like their counterparts here and for that matter around the debt-soaked Western economies, are feeling the sting of higher prices without any offset from a hiring boom or surging wages. The message, in the age of austerity, is get used to it.
That’s not to say there isn’t a bit of relief in sight. Oil prices have come down over the past month and with the global growth outlook weakening, that may well continue.
“With commodity prices down almost 9% from their peak earlier this year and oil prices continuing to slide, it is therefore very likely that inflation could fall faster than the Bank of England expects later this year,” says Markit economist Chris Williamson.
But the bigger problem is that with wages weak (see U.K. wage chart, right) and jobs not exactly growing on trees, everyone’s standard of living is getting squeezed – unless they work at a too big to fail bank, that is.
Financial bubbles, we now learn, are like the old Fram oil filter ads: you can pay now or later. Looking around the Western world lately, it’s pretty clear we’re going to be paying for our past sins for a long time.