UK Stagflation?

The CPI and RPI figures published today seem to confirm the desolate economic situation in Britain. There is a real threat of deflation but also signs of inflation resulting from the weakness of the pound.

If this tendency were to continue, then Britain will be in a dreadful position. House prices will keep falling and therefore more and more people will fall into negative equity. This deflationary spiral in house prices and big-ticket items will probably continue. Investment will decrease. Unemployment will go up. Public finances will be in further mess. However, at the same time, the cost of imports which includes necessities will rise as the pound remains weak and continues to weaken against other currencies.

So in a nightmarish sequence of events, Britian will suffer from deflation, inflation, high unemployment, huge public debts, collapsing currency and complete loss of confidence in British economy and politics at the same time. It is unlikely that there will be one solution for all these problems, and a solution to one of these problmems will make others worse.