Stagflation is a relatively new term that has been banded about recently. Stagflation is a very real and very important condition that could seriously damage the economy in the UK.

Stagflation is essentially a combination of stagnation and inflation and it normally occurs when an economy moves into recession but retains a high inflation rate.

This toxic combination has not been seen in the UK for a long time and is very difficult to deal with.

The standard measures available to the government to relieve an economy from recession would be to cut interest rates or increase spending to stimulate the economy but these would increase inflation and so are not really an option.

As an economy moves into recession there is also a reduced demand for goods and services which as demand falls would normally result in a lower level of inflation.

However the problem we find ourselves in at the moment is even trickier as the effects of the credit crunch have led to a collapse in industrial orders and high street spending at the same time as the cost of food, energy and fuel costs are rising.

How the government deals with this over the next few months is crucial but I know one thing, I wouldn't want Mervyn King's job right now!

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