World Faces“Minor Replay”of Stagflation

“All the worlds main central banks now face a more difficult period.” Goodhart who is a London School of Economics professor said in an interview. “Were going into a sort of a minor replay of the stagflation we had in the 1970s. Growth has been declining productivity has been falling awkwardly and there have been supply shocks on the inflationary side.”

The International Monetary Fund cut its forecast for global growth this year to the weakest pace since 2003 and said that strengthening inflation pressures pose a dilemma for policy makers. The Federal Reserve lowered its benchmark interest rate for the second time in as many weeks to stave off a recession in the U.S. economy the worlds biggest.

“Hes right he usually is.” said Kevin Gaynor head of economics and rates strategy at Royal Bank of Scotland Group Plc.”

Gaynor said that the “core circumstances” facing the world economy are similar to the start of the 1970s. “Loose global monetary policy, global growth thats strong and a whiff of inflation pressures in the air.”he said. “Were exactly in the same position now.”

The oil crises of the early 1970s fueled a jump in wages and inflation that King describes as “the great inflation”. Faster price gains were accompanied by higher unemployment and slowing growth giving rise to the description “stagflation”.

The oil price exceeded $100 a barrel adding to living costs for consumers. King said that inflation in the U.K. may match the highest in a decade this year.

Gaynor said that the difference with the 1970s is that central banks are now better able to respond to such effects because they are independent and have inflation targets.

“Whether stagflation becomes entrenched is not at all certain” he said. “For us it may be a minor replay in the West but in emerging economies its a different story. If anyones going to suffer its them.”

The Federal Reserve lowered its benchmark by half a percentage point to 3 percent saying that “downside risks to growth remain”.

The world economy will expand 4.1 percent this year down from 4.9 percent in 2007 and below the 4.4 percent pace projected in October the International Monetary Fund predicted on Jan. 29. IMF Chief Economist Simon Johnson told reporters that “no-one is going to be exempt” from some slowdown.

“What we need is a great deal of luck.” Goodhart said.

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