Inflation is running at over 100,000%; government statisticians can't find enough products to properly calculate the figures. The economy is in meltdown. No, the afflicted country is not the UK, although you might think so, given the hysteria gripping much of the British media. It's Zimbabwe, where a loaf of bread costs five million dollars, and a life is worth less.
It's worth keeping Zimbabwe and other desperate nations in mind when reading the financial pages. The headline on the Sunday Times business section on 20 July was typical: 'Economy heads for "horror movie"'. If so, we're too easily horrified. UK inflation hit an annual rate of 4.4% in July; in Iraq the rate is 60%. Globally, it is the developing world that is caught in the grip of inflation. Worldwide inflation is set to rise from 3.5% to 5.8% this year - the highest in nine years - according to investment banker Merrill Lynch. But it is inflation in countries like Russia, China and India that is fuelling the global price warming: China's inflation rate is now running at around 8%, up from 1% in 2006.
Of course, in a global economy, inflation overseas can quickly be imported - specifically in the form of increases in the cost of fuel and food, which is exactly what has happened. And while trifling by global standards, the UK's inflation outlook is very much more exciting than for years - certainly more than for the two years I was an economics correspondent, when the challenge of writing up the monthly inflation rate was to find new synonyms for 'stable'.
Excited commentators warned this year of a possible 'Summer of Discontent', an echo of the Winter of Discontent of 1978-79. In that winter, when workers battled against attempted pay restraint by the beleagured Labour government, 1.5 million of them, including nurses and refuse collectors, went on strike. It was the biggest nationwide stoppage since the General Strike of 1926. By comparison, our problems are a Summer of Slight Perturbation.
Still, things are more challenging on the economic front than at any time since the mid-1990s. Things are so bad that there has been - wait for it - an exchange of letters. The governor of the Bank of England is obliged to write a letter of explanation to the Chancellor of the Exchequer if the principal rate of inflation moves one percentage point above or below the target of 2%. The Chancellor then writes a scolding one back. To add to the intended humiliation, the letters are published. There's something very English and public-school about this system of mea culpa.
But the governor Mervyn King doesn't seem embarrassed at all. In his last missive, released in June, King said the rise in inflation above the 3% mark was 'accounted for by large and, until recently, unanticipated increases in the prices of food, fuel, gas and electricity'. He warned that there were more rises in store. The consensus among economists is that UK inflation will bust through the 5% barrier later this year, before settling back again. But King and his colleagues at the Bank protest: it wasn't us: it woz global commodity prices wot did it.
Not everyone is buying the defence. 'This is quite simply a central bank failure,' says Willem Buiter, professor of European political economy at the European Institute, London School of Economics, and a former member of the Bank's Monetary Policy Committee. He points out that the inflationary impact of more expensive imported commodities depends on the exchange rate - and that sterling has dropped by 12% from its peak in July 2007. 'The Bank is not accepting the role of the exchange rate in fuelling the inflationary impact of those price-rises - and that is certainly something to do with them.'
So how bad is it? Not at all by international standards, certainly - although if inflation in less developed nations continues to burn, this will feed through at home. Nor by historical standard either. In April 1975, inflation was running at 3.9% a month. The annual figure was over 30%. Now that's real inflation. That's economy-wrecking, IMF-phoning, government-toppling inflation. That's Life on Mars.
Financial journalists either have short memories or are too young to remember the real deal. They don't have to think that far back: inflation went into double digits when John Major was in the Treasury, about 18 years ago.
One of the results of over a decade of low inflation and reasonable growth has been to set our expectations at such a level than any deviation is treated as a calamity. A single percentage point rise conjures fears of pre-war Weimar Germany, when shoppers had to carry their Deutschmarks in wheelbarrows. Perhaps we should take a deep breath and settle down. Not according to the hawkish Buiter: 'It's like saying that just because Mugabe is not as bad as Hitler, we shouldn't worry about Mugabe.'
Buiter's view is that having a little bit of inflation is like being a little bit pregnant. For him, the key is to clamp down hard before prices get out of control. He thinks the Bank is being too complacent about the inflation risk: interest rates should be jacked up now.
But another alumnus of the Monetary Policy Committee, Christopher Allsopp, now Director of the Oxford Institute for Energy Studies at the University of Oxford, disagrees. 'We used to know real inflation,' he says. 'It is actually rather extraordinary to see such modest effects from such a dramatic rise in the oil price, which previously had a sharp impact on inflation. In general, inflation is fairly modest.'
Allsopp also gives King and his Old Lady of Threadneedle Street a better end-of-year report, suggesting that much of the inflation is outside the control of UK policy-makers, and dismissing Buiter's claim that sterling should have been propped up. 'You can't target inflation and the exchange rate,' he says.
King loved Alan Greenspan's description of the 1990s expansion as the 'Goldilocks' economy - running 'not too hot and not too cold, but just right'. (Of course, Greenspan got it from someone else - for the record, David Shulman at Salomon Brothers). King has wanted to coin his own phrase for years, and was given his chance. He recently described the 10 years from 1997 to 2007 as the 'Nice' decade (non-inflationary, consistently expansionary): but only to declare that it was over. Mervyn King: no more Mr Nice Guy.
King is clearly worried, though. He and his colleagues have a difficult balancing act. City economists - not known for their literary inventiveness - have unanimously declared the Bank to be 'between a rock and a hard place'. The rock is inflation, but the hard place is recession, or at least a sudden reduction in economic activity. Growth has slowed sharply: the IMF thinks the UK economy will grow by 1.8% this year and 1.7% in 2009; the Treasury is only a little more optimistic.
Another antique word, 'stagflation' - a nasty term for the foul combination of stagnation and inflation - has been dusted off and pressed back into service. First used by the Conservative MP and later Chancellor Iain Macleod in 1965, the word found its audience in the 1970s, but has since been little used. But when I was in the US in July this year, CNN was running a whole series labelled Stagflation Alert. Again, there's some premature apprehension.
In July the Bank's deputy governor was asked if he could rule out recession - a classic journalistic trick, of course - and he said: 'I can't rule it out.' The econo-nerds among you will know that recession is technically defined as two successive quarters of negative economic growth, and the risk of this remains fairly slight. But the Bank is mindful of the need to head off inflation without walloping the real economy - which is why it continued to cut rates down to their current level of 5%, even as inflation rose in the first half of 2008.
The principal danger is that pay packets will begin to thicken in response to higher prices, setting up the dreaded wage/price spiral, with higher salary costs feeding through into higher prices, and so on. Right now there is little sign of this, as Allsopp points out. 'Nominal wages have not risen in response to consumer price inflation. The second-round effects have so far been very modest. Of course, that's why people are so upset.'
There are some headline-grabbing exceptions: in June, the drivers of Shell's tanker lorries won a 14% pay rise, sending a shudder down the spines of Treasury and Bank officials. Of course, Shell can afford it: oil prices have been going through the roof. Another economic character from the 1970s is back - petroinflation. Drivers are feeling the pinch at the pump, with the price of petrol and diesel up by 24% over the past year: in the circumstances, the decision of the Government to postpone its planned 2p rise in fuel duty was a necessary act of political survival. Domestic fuel has become 14% more expensive over the past 12 months - and those still using heating oil have been walloped with an 88% price rise.
Environmentalists have greeted the oil price hike as a potential boon. It has certainly pushed electric cars onto the news agenda, and looks to be reducing car mileage even in the automobile-obsessed US. Unfortunately, expensive oil is at best a mixed blessing for the planet. 'The big problem with a higher oil price is that it makes coal more economical,' says Allsopp, 'as well as environmentally destructive forms of oil extraction, including from tar sands. These are both bad news from an environmental perspective.' On the other hand, a big shift towards greener cars can only be good news in the long run.
Along with pricier petrol, the bill for the weekly food shop, for those who can still afford the petrol to get there, has jumped by 11%. Given these Olympic leaps in fuel and food prices, it looks like inflation should be much higher than 3.8%. Of course, these bills are the most visible to many of us. But food, petrol and domestic fuel together account for just 17% of the average family's outgoings - and the rest is accounted for by spending on items that are either stable - such as household appliances and medicine - or falling; the price-tags on clothes and shoes have dropped by 8% and 4% respectively in the past year.
The people who are most upset are those on a low income who have no choice but to drive to work and have a hungry family to feed. Households like this spend a much higher proportion of their money on the goods that are rising most quickly in price. This is a regressive brand of inflation - which makes it politically as well as economically dangerous, especially for a Labour government.
The other problem for the Government is facing down the public-sector trade unions, whose members are demanding more pay. One of the reasons why price inflation has not yet ignited a round of wage rises is the relative weakness of the unions, especially in the private sector. At the end of the 1970s, more than half the workforce was in a union; today, the figure is below 30% - good news in terms of heading off the wage/price spiral, but less so in terms of people's immediate standard of living.
Ironically, the only remaining bastions of union power are in the public sector - but Gordon Brown is understandably determined to hold wages down. The difficulty is that as his political position weakens, his reliance on the unions grows - especially on Unite, the new public-sector super-union. In the first quarter of 2008, more than 90% of donations to the Labour Party were from union coffers.
The Government has handed out below- inflation pay rises to most public-sector workers, including teachers, nurses, civil servants and police officers, in what former Unison general secretary David Prentis described as 'the most unjust pay policy I have ever seen'. Strike action is ramping up: but it seems unlikely that Brown will budge. If one group of workers succeeds in bumping their pay rises, it would embolden the others. In an attempt to show solidarity, ministers have foregone any pay rise and Mervyn King has turned down a 30% salary increase recommended by an independent review body and taken a 2.5% rise instead. (Arch-critics suggest he should have stuck to the 2% inflation target.)
Of course, the economic impact of King's or the Cabinet's pay rise is zero. But they know that inflation is as much mind-game as hard economics. If people are reasonably sure that inflation can be contained, they are less likely to demand pay rises. This is one reason some analysts think the Bank should raise rates. Credibility is a central bank's most important asset, and the Bank of England has already taken a reputational hit for the debacle of Northern Rock.
British consumers, polled in June 2008, thought inflation would be 4.3% a year later. That was the highest expected rate since the Bank began collecting the data - but it was in line with City expectations - and really quite low, considering the breathlessness of some of the media coverage. To the extent that controlling inflation is like a gigantic game of blind man's bluff, the policy-makers are so far winning. People have even accepted the new measure of inflation - the Consumer Price Index - which replaced the old Retail Price Index (RPI) measure as a result of a complex Blair-Brown wrangle over the single currency. And it's just as well: the RPI rate, which includes housing costs, is currently at 5%.
Inflation is back, but not yet with a vengeance. Rather than anxious western middle classes, it is the world's poor who have most to fear. They know the truth of Adam Smith's statement: 'The real price of everything ... is the toil and trouble of acquiring it'.
1757: 21.8% - Seven Years War, fought over trading rights, brings huge rise in national debt and massive price hikes.
1800: 36.5% - French war breaks the bank. Introduction of income tax in 1798 doesn't help consumer sentiment.
1802: -23% - Treaty of Amiens and lull in war with France leads to price drop. Huzzahs throughout the land.
1917: 25% - Economic effects of World War I disastrous as money chases too few goods.
1922: -14% - The country hits recession in 1921. Over 1920-33 prices fall every year except one; economy flat.
1940: 17.2% - Inflation spikes as our brave boys battle the Messerschmidts over Kent.
1975: 24.2% - The bad old '70s - wages and prices spiral. Economy in the dumps - UK is the sick man of Europe.
INFLATION - THE HISTORIC PERSPECTIVE
2008 (Jun)* 3.8%
Inflation has been around for centuries. Prices have risen 118 times since 1850, meaning that a penny in 1750 had greater purchasing power than £1 today. What is a modern, essentially post-war development, however, is the steady upward trend in inflation. Before this, rates fluctuated in response to market conditions but did not trend upwards. Prices doubled during WWI, for example, but fell in 1921-38. In contrast, prices have risen every year since '45, with an aggregate rise of over 22 times. Prices tripled in 1974-81, and rose again by 52% in 1988-98. It seems we're in for another dose of inflationary medicine in years to come.