Home > The Economy > Question of the week: Is what we’re about to see a new form of ‘structural stagflation’?

Question of the week: Is what we’re about to see a new form of ‘structural stagflation’?

January 25, 2011 Leave a comment Go to comments

A comment posted by Jon Cloke on Friday asked if “what we’re about to see is a new form of ‘structural stagflation’?  He considered the question in the context of the UK, but it deserves, as Cloke suggested, to be considered more widely and in greater detail. 

January 21, 2011 at 2:22 pm

I don’t hear any mention of the ‘S’ word – stagflation, which is what we’re headed for in the UK, in a far more vicious variant than in the early 1970s. Unemployment is going to increase substantially this year and inflation is going to carry on advancing, in the main because of the incredible market concentration we now have in all vital goods. The prices of oil, electricity, public transport, food etc. are all concentrated in the hands of oligopolies, many of the players in which are also monopsonists. This is surely going to keep inflation strong at a time when employment craters and yet we hear nothing about this – does anyone else agree that the composition of inflation in the UK has changed through increasing market concentration, and that what we’re about to see is a new form of ‘structural stagflation’?

For more background, check out Knibbe’s post to which Cloke was responding: Meanwhile in Europe…(6). (De-)construction

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Categories: The Economy
  1. Stefan L. Eichner
    January 25, 2011 at 10:01 am | #1
    Reply | Quote

    Jon Cloke is right. More and more markets are dominated by just a few big companies and price competition is far from beeing effective. Unfortunatley mainstream theory – especially competition theory (workability) – poses this kind of oligopolistic structure to be optimal for growth and employment in a globalised world. Seen from a different theoretical perspective (i.e. theory of “evolutionary competition”), quite the opposite seems to be true, because high concentration is a typical mark of mature markets. Contrary to young markets major innovations, leading to significant and dynamic changes, does no longer occur, meaning the character of competition changes in the course of evolving markets. Price competition might be strong on mature and stagnating markets, but innovative dynamic is not. For this reason financially well equiped big companies are able to kind of rule price competition as long as innovative dynamic keeps low. If this is true for allmost all leading (global) markets inflation might occur even in a recession.

  2. john gelles
    January 25, 2011 at 10:01 pm | #2
    Reply | Quote

    High unemployment will lower inflation in the price of things working people buy. Stagflation suggests the when this happens, lower prices won’t last as — suppliers find an optimum profit level of production and sweat shop prices for labor and its products are not quite reached.

    I suggest that government can and should prevent monopolies (public and/or private) and subsidize low volume producer profits to keep small and medium business in the game.

    Exact targets for all industries will be costly to develop. But, our productivity (a gift of high technology) will allow us to afford these costs of free enterprise in fact.

  3. merijnknibbe
    January 25, 2011 at 11:05 pm | #3
    Reply | Quote

    Depflation might be a better name.

    Inflation is a ‘general rise of the price level’. We do not measure this very well. At this moment, the best metric of this is the ‘expenditure deflator’ of GDP – but even this one does not capture prices like wages, stock prices, e-bay prices and existing house prices. Let’s see what’s happening, with a quick glance at the European data.

    Consumer price inflation is increasing in Europe (core inflation is still stable, but while core inflation might be more important for monetary policy, consumer price inflation is more important to spending). However, except for exotic places like the UK, Romania and Iceland all countries still know ‘main categories’ of goods like ‘shoes an clothing’, ‘communications’ and ‘culture’ which show declines. Consumer price inflation is not yet general – though heading that way.

    But wage inflation is declining. Eight countries already knonw lower nominal wages (The Baltics, The GIPS, the Netherlands). In almost all other countries, nominal wage increases have decreased, compared with a year ago, with 1 to 4% – the remaining ones already having low increases in 2009.

    More or less the same (with much larger differences between countries) for house prices.

    In most European countries, it might therefore be too early to talk about a ‘general rise in prices’.

    In the UK, there however might be a downward depflation spiral: price increases are higher than in most other countries, large increases in VAT and indirect taxes were introduced this month which leads to decreasing real wages which, together with increasing taxes and less transfer incomes and increasing unemployment lead to a severe decrease of spending and a decline of production. Theory? GDP declined in the fourth quarter of 2010:

    http://www.statistics.gov.uk/pdfdir/gdp0111.pdf

    And no, that was not just due bad weather.

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