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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n