What is stagflation and its impact on the UK economy?

Stagflation has become a rising tide on the UK economic front in recent weeks, with the word batted back and forth across the news forums in a swell of recession warnings and spiking inflation. However, what does the term mean for the UK economy, and what does it mean for the average British consumer?

Stagflation is defined as a period of time when the economy is marked by a state of economic stagnation and high rates of inflation (hence, stagflation), typically accompanied by high rates of unemployment.

Rising Inflation

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The UK economy actually shrank by 0.1% in March 2022, following no growth over February, according to the Office of National Statistics (ONS).

Meanwhile, the Bank of England recently hiked interest rates 0.25% to 1% in a bid to stamp out 7% inflation, which is estimated to hit 10% in October this year as the energy price cap rises again and the cost of living sends UK households into a predicted debt spiral.

The Bank is supposed to keep inflation below 2%, and while surging inflation sometimes heralds a booming level of demand in the economy, the UK’s present situation is actually sounding the alarm of a crushing deficit in supply.

Oil prices have seen a resurgence to long forgotten levels over $100, with the price of Brent crude peaking to almost $130 per barrel in mid-March.

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The oil prices have been gaining ground due to the Russian invasion of Ukraine consequently choking off the supply of Russian energy reserves to the EU bloc as Putin threatened to turn off the tap on the country’s 7.8 million barrels of oil per day in exports.

However, companies including UK energy giants Shell and BP have divested from Russia and its state-owned gas firm Gazprom, exacerbating the oil crisis while the UK scrambled for alternative fuel sources.

Russia and Ukraine also account for almost 30% of the global wheat supply, with the region earning the title “the breadbasket of Europe”, sending the price of wheat on the increase, while cooking oils produced by the countries have also seen an uptick in price on the back of shortages due to the war.

On the other side of the global market, Covid-19 lockdowns in China as a result of the country’s “zero-Covid” policy have seen fears surge over an economic slowdown, as major companies including Apple suffer under production grinding to a halt in tech hubs such as Shanghai.

Economic Stagnation

Covid-19 had already put the brakes on the UK economy due to lockdowns and a decline of the high street as stores closed up their doors in droves. However, the market barely had time to recover on the re-emergence of people into society before skyrocketing inflation clamped down on excessive spending and millions of households faced the unpleasant choice between heating and eating as the energy price cap rose 54%, tacking on an additional £700 to the bills of many consumers who were already living on razor-thin margins on their pay cheques.

Retail stocks are retreating and credit card debt is predicted to hit fresh highs as families struggle to make ends meet. Chancellor Rishi Sunak has been criticised for the meagre offerings of his Spring Statement mini-budget, and many are calling for his Summer Statement to bring a more tangible level of relief to impacted households.

The UK is currently set to have the slowest growth of the G7 nations in 2023, according to the International Monetary Fund (IMF).

Meanwhile, the Bank of England is projected to increase interest rates to 1.25% in its next meeting in June, which is almost definitely going to put a freeze on consumer spending, just as the post-Covid-19 economy was stumbling back to its feet.

“The move by the Bank’s rate-setters to increase rates lumps even more pain on households struggling with the cost of living crisis,” said AJ Bell head of personal finance Laura Suter in response to the rise to 1% in early May.

“The global nature of the drivers of inflation means that this increase to 1% is very unlikely to beat inflation into a hasty retreat, but what it is certain to do is pile more misery on people already having to rely on debt just to pay their bills.”

As the crunch of rising prices from lack of supply and surging costs of living from energy and goods inflation continue to clamp their jaws around consumer wallets, experts are warning that the UK is barrelling towards stagflation. Unfortunately, it seems the experts are probably correct.

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