NICE decade is over

Mervyn King declared that the NICE decade was formally over in his Inflation Report published today – NICE stood for non-inflationary continuous expansion (a good term to use in the exam) – but the combination of sharply rising food, energy and fuel prices is driving inflation higher whilst contributing to a fall in real incomes and a wider economic slowdown.

Will we suffer from a nasty bout of stagflation? This was discussed in the Independent this morning in an article by Sean O’Grady. There was actually a better article by Hamish McRae in the same paper which took a longer term view about the likely path for living standards over the next decade or so.

I have reproduced some of it below because Hamish is very good at capturing important developments and putting them into context – if you can do the same over the next couple of weeks, you will surely get the dividend from a keen eyed examiner!

Hamish writes:

“We are accustomed to a world where natural resources are reasonably plentiful and reasonably cheap. Within the West we have until recently had an increasing workforce. And we have had steady gains in productivity. As a result, living standards have risen pretty steadily every year, with only occasional blips during global downturns.”

“We are now starting to see a different sort of downturn. We cannot assume that natural resources will be either plentiful or cheap, given the growth that is taking place in the developing world, particularly in China but also in India. We won’t have an increasing workforce for much longer – in Germany it is already shrinking – and that smaller workforce will have to support a growing number of pensioners. And while it should be possible to keep increasing productivity, it will be much harder to do so as the weight of our economies shifts from manufacturing to services. You can run car plants with fewer people and still produce good cars but it is hard to runs schools, hospitals and care homes with smaller staffs, or at least to run them well. Something has to give, and that something is the rate at which living standards can rise.”

The rest of the article is here

Martin Wolf also writes in the FT today about how we should adjust to a world where oil is no longer cheap. Again, if you have a few minutes this is worth reading through