The return of Stagflation?

The Bank of England's monetary policy committee concern is to keep inflation within a target range they call it "Target 2.0" To keep within the target set they have used interest rates currently standing at 5.75%, but over the past months we have had several shocks to the system namely the subprime fallout,credit crunch and oil prices. All have led to a economic slowdown in the UK and America so kickstarting a sluggish economy would probably mean a drop in interest rates right? So what about the inflationary pressures caused by high food price and fuel prices what about target 2.0? The problem is as inflation rises the MPC won't be able to cut interest rates as some have forecasted last week. We may be witnessing something unseen since the 1970's Stagflation the combination of stagnant economic growth and inflation do we need to worry? Yes We have a huge surge in food prices, which includes staples such as bread, milk, eggs food prices are moving faster since the 1970's and will become a significant item in household budgets. OPEC have recently met and have agreed not to increase oil production with prices still around the $100 it is us the consumer who will bear the ultimate price increases.Then Sterling at a 26 year high against the dollar but weak against a other currencies notably the euro. Sterling needs to lose some ground against the dollar and it will no longer provide the insulation against global prices that have been such a feature of recent times. A falling pound always means rising inflation. Sadly with rising council tax bills, rises in transport costs, utility bills we should expect higher inflation added to this an economic slowdown which means stagflation. What does mean to the US economy? Well inflation may be up to 5% by year's end the plunging dollar and GDP shrinking in the fourth quarter leaves Bernanke no room for those rate cuts to shore up the ailing economy leaving us with a painful headache that will take us into 2008 and beyond.

The deflating dollar is in grave danger of losing its pole position as the world's reserve currency. During OPEC's recently concluded meeting the members discussed the possibility of ditching the dollar from the basis of oil trades. Saudi Arabia objected as doing so would have triggered a run on the dollar. As the Bush Administration sees the balance of payments fall due to the weakened dollar it only makes up 12% of GDP, 70% of US GDP is consumer spending. My concern is how much longer will those holding large reserves of US assets hold out.

Conrad Black will now be sentenced December 10th 2007 instead of November 30th. Black who was found guilty on three counts of fraud and one of obstruction of justice faces up to 24 years in jail.

Do we really believe Fed boss Ben Bernanke's forecast for the US economy? His forecast is of moderate, but positive growth not recession. However they must stop tinkering with official stats and just admit the US is in recession. Bob Herbert from the New York put it this way,

"The Fed must wake up and smell the recession"