The UK in particular has a lot to worry about. In the '70s it suffered from a nasty case of stagflation, and now that the country's economy is ending a period of high growth there are worries that it will not manage a "soft landing", a gentle economic slowdown that keeps the economy above water while inflation cools.

Among the doubters are Eddie George, governor of the Bank of England, who is in charge of interest rates; and Doug McWilliams, of the Centre for Economics and Business Research, who predicts that economic growth will be cut in half this year, while inflation will stay above the government's 2.5% target.

What is stagflation?

Stagflation is the combination of inflation and recession - an economy which begins to shrink while prices still continue to rise.

In the past, economists generally argued that the two were mutually exclusive - inflation would occur when the economy was strong, while a recession would cool inflationary pressures. But these relationships no longer seem to hold in either direction.

Eddie George: Governor of the Bank of England

One factor which can change the relationship is changes in prices of goods outside the domestic economy. For example, higher oil prices in the l970s pushed inflation into double digits despite a slowdown in UK economic growth.

Another distortion can occur when one part of the economy is growing but another is shrinking.

This seems to be the case in Britain, where manufacturing appears to be in recession, while the service sector is still growing. This may mean that wages are growing in one sector while falling in others.

The third problem comes from the timing of any adjustment in the economy.

For example if there is a change in tax levels, there may be a time-lag before people notice the difference to their pockets and start to adjust their spending.

This can make it harder to judge what direction the economy is actually going in.

The dangers of stagflation

The problem for the government is that stagflation poses an economic policy dilemma: should the government try to tackle the recession, cutting interest rates and taxes, or should it try to keep inflation low, raising interest rates and taxes?

The current government, like the past Conservative one, has made the fight against inflation its priority. And it has given the Bank of England operational independence to set interest rates in order meet that objective.

But the problem is that no one knows how much more the Bank of England will need to raise interest rates to reach its inflation target.

Wages seem to be growing faster than productivity, and there are still mixed signals on the high street regarding consumer spending.

Another problem concerns the pound. High interest rates have helped keep it high, which has hurt manufacturing, but has helped keep import prices low and curbed inflation.

Any sudden change in the exchange rate could mean another burst of inflationary pressure.

The government had hoped to create a "stable macro-economic framework" which would allow business to plan ahead.