AUS
NZ
UK
CA
USA
FRA
GER
ESP
ITA
NLD
PRT
SWE
GRC
IND
POL
BRA
ZAF
RUS
CHN
UAE
Highlights
- The fear of stagflation is looming upon Britons as they are battling with rising inflation and interest rates, surging energy bills, supply chain issues, etc.
- The BoE has raised the interest rates for the third consecutive time to offset the effect of soaring inflation.
- As wages are growing and the unemployment rate is dropping, experts are anticipating the BoE may raise the interest rates further in due course.
The term “stagflation” is coming up in a lot of discussions lately as the prices are soaring and the Russia-Ukraine war has worsened the already volatile economic situation in the UK. The fear of stagflation is looming upon Britons as they are battling with rising inflation and interest rates, surging energy bills, supply chain issues, etc. But what exactly is stagflation and how is it any different from inflation?
Let’s briefly differentiate between the two and try to analyse what’s in store for the UK economy.
Stagflation vs. Inflation
Rising inflation levels in the UK have been a hot topic in recent times. Inflation is the overall rate of increase in the prices of goods and services. The UK inflation level has recently hit a 30-year high, reaching 5.5% in January 2022. According to the Bank of England (BoE), the inflation levels may cross the 7%-mark next month, heavily breaching its 2% target. To offset the effect of rising inflation, the BoE is going for interest rate hikes. After two consecutive rate hikes in December and February, the BoE raised the rates on 17 March for the third time in a row from 0.5% to 0.75%. The tightening of the monetary policy may help in stabilising the inflationary situation in due course.
2022 Kalkine Media®
If the high inflation levels are accompanied by low economic growth and high levels of unemployment, the UK economy may go through stagnation, which brings us to the concept of Stagflation, i.e. stagnation and inflation. While inflation has its benefits and to a certain extent, it is important for the stable growth of any economy, stagflation must be avoided at all costs as it is detrimental to the economy. When the inflation level is high, the supply of money circulating in the economy also rises, which is accompanied by tough regulations that lead to a situation of stagflation. Inflation, on the other hand, can be in-built in an economy or can increase due to a rise in consumer demand as well as increasing costs.
Is the UK headed towards stagflation?
The situation of stagflation was witnessed in the 1970s and now the fear of stagflation has become apparent again as the economic growth is stabilising, but the inflation levels are skyrocketing amid the recovery phase of the pandemic. The Russia-Ukraine war is further raising the already high inflation levels, mainly due to the rising costs of energy. The war may have an impact on the overall GDP growth of the economy, which has sparked stagflation fears among Britons.
RELATED READ: AstraZeneca, GSK, Medica: Are healthcare stocks doing well now?
According to the latest labour market overview for the last quarter released by the ONS on 15 March, there has been a 0.2% fall in the UK unemployment rate that touched 3.9%. This was accompanied by a 0.1% hike in the economic inactivity rate, which hit 21.3%. As wages are growing and the unemployment rate is dropping, experts are anticipating the BoE to raise the rates further in due course.
2022 Kalkine Media®
On 23 March 2022, Chancellor Rishi Sunak is expected to come out with the Spring Statement addressing the cost-of-living crisis that the Britons are facing, which is expected to get worse in the future, and may even lead to stagflation. The fear of stagflation is not just there in the UK but also in the US. The Fed is also raising the US interest rates to stabilise the high inflation levels. However, it’s hard to predict the trajectory of the crisis as of now.
RELATED READ: National Grid, Drax, SSE: Should you buy these energy utility stocks now?
Bottomline
Rising inflation and unemployment accompanied by a slump in economic growth may lead the UK towards a situation of stagflation. However, the situation is expected to remain under control with the UK Government taking steps to counter the fears of stagflation. Britons are currently waiting for the mini-budget due next week to get a clearer idea about where the economy is headed.
