Some say the world will end in fire, some say in ice.

These apocalyptic alternatives for mankind's fate offered by the American poet Robert Frost have been seized upon in recent months by leading policymakers to dramatise the dangers confronting the world's developed economies.

Ben Bernanke, the Chairman of the US Federal Reserve, and Dominique Strauss-Kahn, the managing director of the International Monetary Fund, have both exploited Frost's competing visions of doom to depict the conflicting threats to world prospects from stuttering growth, on the one hand, and rising inflation, on the other. At least it makes a change from the four horsemen.

In Britain in the past few weeks, though, the increasingly vulnerable economy has seemed to be beset by both fire and ice, simultaneously.

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Talk that the end of our prosperity is nigh has burgeoned as a barrage of dire economic news has suggested that icy winds of recession are howling through the high street, the housing market, and the City, even as surging oil prices and a soaring cost of living have rekindled fears that inflationary pressures have become inflamed.

The implications have been equally as chilling for families and businesses as they have been incendiary for markets, the media and in Westminster.

The seeming emergence of this economically toxic cocktail of stalling growth and activity with raging inflation has sparked a flurry of speculation over a return to the Seventies-style scourge of “stagflation”.

In the press, stagflation is the economic bogeyman of the moment. Mentions of it over the past month in national newspapers totalled 94, up from only 15 in April.

The stagflation scare is understandable. Last week the monthly purchasing managers' surveys of manufacturing, construction and services, to which the Bank of England pays intense attention, pointed to all three sectors being in decline for the first time since 2001.

Yet, at the same time, the same surveys also showed that, in manufacturing and services, both companies' costs and the prices they are charging their customers were rising at, or close to, record rates during last month.

It is important to keep some perspective. Inflation remains a long way from its highs in the years when Britain was branded “the sick man of Europe”. On the retail price index (RPI), annual inflation in May was 4.3 per cent - far below the dizzying peaks of 26.9 per cent reached in 1975.

Compared with Britain's Seventies malaise, stagflation in its present form is still a pretty mild dose.

The crucial question is whether this present, mild form of the malady proves just a temporary affliction, or becomes chronic. There are at least three good reasons to think that it will prove to be merely a passing symptom, rather than a lasting sickness.

The first is arithmetic. In the very short term, recent sharp rises in fuel and food prices will continue to propel inflation upwards. Yet for overall inflation to keep rising, rather than begin to fall back by later this year, oil and food prices will need not only to keep rising but to rise even faster. This seems very unlikely indeed, since a series of rogue factors conspired this year to stoke food and energy costs.

ING, the investment bank, calculates that even if oil prices rose to $200 a barrel, and stay there, headline US inflation would plunge next year simply due to the maths. Even more strikingly, if oil fell to $100 a barrel by the end of next

year, which seems much more likely, US headline inflation would actually turn negative. These sums work much the same for Britain.

The second, compelling reason to expect stagflation to be only a temporary scare is rapidly deteriorating economic activity.

In every downturn there is a marked time lag before slowing growth pushes inflation lower.

As conditions weaken, and families and businesses cut spending, there is less demand chasing the supply of goods and services.

Companies then have to compete harder, and prices slide as extra slack is created in the economy. The sharper the downturn, the greater the slack that is opened up and the more potent the downward pressure on prices.

The time lag can be both long and variable but Britain must surely now be approaching this critical tipping point. Goldman Sachs research estimates that across advanced economies the delay averages between four and six quarters in most economic cycles.

So, based on the world upswing having peaked sometime last autumn, the moment of truth when inflationary pressures start to ease should arrive shortly. Given the severity of the slump in activity implied by the latest bleak economic news, a truly icy blast should soon be helping to extinguish Britain's inflationary fires.

The third, and final, reason to think that the stagflation bogey will soon cease to be a reality is pay.

For inflation to become truly entrenched in the economy and full-blown stagflation to take real hold, the present steep increases in living costs would need to stoke an outbreak of inflationary pay deals, leading to the return of that other Seventies bane, the wage-price spiral.

Yet there is scant sign of this happening. Far from taking off as inflation has climbed, pay settlements have remained muted. As Goldman Sachs notes, the data indicates that wage growth is actually falling, rather than accelerating.

These favourable trends are underpinned by far fewer pay deals now being pegged to inflation than in the Seventies - only about 10 per cent of settlements are now explicity linked in this way.

With unemployment rising, and workforces now likely to be more anxious about keeping their jobs than raising their pay, it seems probable that the trend in earnings will remain tame.

Taken together, all of this implies that by next year slump and stagnation, not stagflation, will dominate the headlines.

The lasting danger to the economy will prove to be from the icy chill of recession, rather than the flames of inflation.

gary.duncan@thetimes.co.uk

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