Are we heading for a new era of “stagflation”?

James Meadway in New Statesman:

Stagflation”, an appropriately ugly word coined in the 1970s to describe the grisly combination of high inflation and low growth that afflicted that decade, is making a return to economic discussion. Nouriel Roubini, the “Doctor Doom” credited with predicting the 2008 financial crash, has suggested that the “mild stagflation” of earlier this year could be followed by a more serious recurrence in the future. As I’ve written in the New Statesman over the past 18 months, endemic Covid alone would be enough to drive up costs and therefore prices across the world. The economic outlook is uniformly grim – perhaps more so than even Roubini thinks.

First, while inflation is higher than it has been, and is likely to remain so, this is not the result of the extraordinary expansion of the money supply over the past year, as most “inflation hawks” have argued. Their theory seems simple – more money chasing the same goods makes prices go up – but in reality the volumes of Quantitative Easing (QE) cash that central banks such as the Bank of England have issued since early last year have made their way into different forms of hoarding, rather than spending.

The British government has spent, for example, extraordinary amounts on the furlough scheme and, in effect, paid for it with QE. But with households having saved an estimated £200bn since the start of the pandemic, that money is not entering the wider economy and so is having limited impact on prices. The injection of QE into the financial system has only caused prices to rise in specific markets – helping to support rising house prices in the UK and US stock markets.

The causes of the current general rise in prices are more serious, and harder to solve. The supply chain disruptions caused by Covid are obvious contributing factors, with the shock of lockdowns and factory closures last year still making their way through the system. But the ongoing, and perhaps permanent, impact of Covid as the virus becomes endemic – with people continuing to fall ill, being forced to self-isolate, and the extra costs and hassles of performing many economic activities – will result in significant costs across the economy.

More here.