Stagflation: BoE cheers

In recent weeks, the Bank of England’s problem has been inflation. It is too high at 3.7 per cent in December and going higher. Now the Bank has something apparently worse on its hands: stagflation. The Office for National Statistics has just shocked everyone by saying the UK economy contracted by 0.5 per cent in the final quarter of 2010. Expectations had been for a 0.5 per cent increase.

Nothing could cheer the Monetary Policy Committee more. Now it can bat away suggestions it should be raising interest rates with the comment that this would be nuts as the economy is again contracting. High inflation is nothing to worry about if the economy is still in intensive care.

The big decreases were in services and construction, with services contributing -0.4 percentage points to the overall total and construction contributing -0.2 percentage points.

And how much is the weather (snow) to blame? The ONS says the picture would be flattish, i.e stagnation, without the snow.

That is not very good either. Economists got their forecasts wrong because they based too much of their analysis on the still strong production figures for the quarter, which were already known.

Stagflation is really miserable and the big deficit cuts have not been implemented yet. Nothing in these figures bodes well for 2011, unless you are the Bank of England, worried about your inflation-fighting credibility.