After years of believing in the gorgeous beauty that was the Goldilocks economy, financial markets have had a rude awakening. Goldilocks has a spiteful twin sister: stagflation is not nice at all; the porridge she offers is both cold and expensive. She is the alter ego of Goldilocks. And we are going to hear a lot more of her next year.
Even the threat that stagflation might be about to make a reappearance has come as a shock. She has been living a reclusive life since the late 1970s, stuck away in the attic like Mrs Rochester. Life has gone on, but at the back of every policy-maker’s mind is the fear that there will be a return to the violent behaviour of 30 years ago when inflation soared and economies stagnated.
At this point it has to be said that the years may have mellowed stagflation. At present, even the gloomiest forecasters are predicting only a slowdown in growth next year rather than an outright contraction.
That said, even the whiff of stagflation complicates matters for policy-makers. They are nowhere near sorting out the global credit crunch, so the idea that a slowing in activity next year could be accompanied by rising inflation is unwelcome, to say the least.
If the dollar continues to drop, and inflation gets worse, I am going to have to ask Fr Kendall for an increase in that $500 a month he pays me to post these comments.