With inflation expected to rise above 3% and the economy gripped by the credit crunch, the spectre of stagflation is looming.

The term "stagflation" - high inflation combined with economic slowdown - was first uttered by Conservative MP Iain Macleod during a Commons debate in 1965.

He spoke of the having "the worst of both worlds - not just inflation on the one side or stagnation on the other, but both of them together".

Until then it was generally assumed under the prevailing Keynesian economic theory of the day that both conditions were unlikely to occur at the same time.

That doctrine was completely debunked in the early 1970s when soaring oil prices pushed countries around the globe into recession and led to run away inflation - peaking in the UK at 24% in 1975.

That crisis provides a classic example of the factors needed to push an economy into stagflation.

Economic theory suggests that the condition can be brought on by one of two things - supply shock or inappropriate monetary policies.

In the case of the early 1970s, supply shock came in the form of oil. It raised prices at the same time as slowing the economy to the point of recession.

Government economic mishandling can come in the shape of overzealous monetary policy. By pumping cash into the system to ward of a recession, policymakers can set off spiralling wage increases and soaring inflation.

Present day Zimbabwe provides a glaring example of how centralised mishandling of the economy can lead to stagflation.

So how bad are things in the UK? Even if inflation, as defined by the consumer price index (CPI), does hit 4%, it could hardly be described as rampant, or runaway.

Likewise, few are predicting prolonged negative growth in the economy or even the two consecutive quarters of falling output needed for the country to be in recession.

But compared to the growth seen in recent years, it does represent a marked downturn.

Mervyn King's NICE decade (non-inflationary continual expansion) lasted from 1997 to 2007. It is now over - the global credit crunch has seen to that.

Moreover, it is argued that official figures are masking the true gravity of the situation.

CPI hit 3% in April - above the 2% target, but way below other inflation indicators. The Retail Price Index (RPI), which includes housing costs, is edging towards 4%.

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