Stagflation Or Deflation?

We examine whether the UK is experiencing stagflation or a deflationary recession.

A stagnant economy, dysfunctional financial system and five-year government bond yields under 2% are all indicative of today's UK economy – and Japan's in the 1990s. Back then, after the great stock market crash the equity market fell by 60% in just two-and-a-half years (1989 to 1992).

Looking back at Japan

In marked contrast to Japan though, UK inflation – or at least headline inflation rates – is still relatively robust with the Retail Prices Index (RPI) and Harmonised Index of Consumer Prices growing at 5% and 4.2% year on year (y/y), respectively. It should be noted however that Japanese inflation did not turn negative y/y for nearly five years after the stock market peaked (finally turning negative in July 1994) because inflation nearly always lags behind real economic activity.