Not what it used to be

Look at the following economic numbers and see if you can guess what they refer to:

Japan, 1.6; Germany, 3.0; France, 3.3; UK, 3.7; US, 4.2; China, 6.7; Russia, 14.0.

Economic growth? Unemployment? Interest rates? No, none of those fit the figures. China is forecast to grow by nearly 10 per cent this year, and the US by just 1.6 per cent. Unemployment in Japan is at 4.2 per cent, while it is 8 per cent in France. The yield on 10-year government bonds is around 4.4 per cent in Britain and 7.8 per cent in Russia.

So what are the figures in my list? Actually, they're the forecast inflation rates for consumer prices in 2008. I've taken all these figures from the latest edition of The Economist .

And my point is? Simply that, despite all the huffing and puffing about rising prices, these figures — with the possible exception of Russia — don't really look too bad at all. Yes, they are often above the central banks' targets, which in the US, Britain and the eurozone are around two per cent. And inflation has definitely increased significantly over the last year in most countries. But it hardly looks like an inflationary disaster.

Economic commentators love nothing better than to make comparisions with previous crises. This gives them the feeling that they are writing something important — and it may help to sell their products. But that doesn't mean their comparisions are correct.

Before the recent financial crisis exploded, there was much talk about how policymakers were boxed in by two evils: economic stagnation and high inflation, a combination often called "stagflation". Comparisons were made with the 1970s, when two oil-price shocks caused high unemployment and rapid inflation (over 20 per cent in Britain).

Modern policymakers, it was said, couldn't afford to lower interest rates to get their economies going because the risk of inflation was too high. Stagnation was back, it was claimed.

What nonsense that now seems to be. The financial crisis — and the dramatic fall in oil prices in recent weeks — has, in one respect, made the policymakers' lives easier. Inflation is clearly not the problem. Nor is stagflation. The real dangers are a recession and a banking collapse.

That means interest rate cuts are back on the agenda. And rightly so.