The UK’s latest inflation numbers are further evidence that the UK is now facing ‘stagflation’. Stagflation is the combination of high inflation, stagnant economic growth, and growing unemployment.
Data published on Wednesday (20 August) shows the UK’s inflation issues look set to continue, with the Consumer Prices Index rising to 3.8% in July, up from 3.6% in June.
With the Bank of England now forecasting inflation to peak at 4%, before falling back, there is considerable pain yet to come for consumers at a time when economic weakness in the UK is becoming further exposed.
“July’s inflation reading is a noisy one, what with the summer holidays and activities having an impact on the monthly rate of change,” said Lindsay James, Investment Strategist at Quilter.
“Indeed, Oasis’ long-anticipated reunion tour will have bumped up hotel prices, while the timing of the school holidays has led to a significant increase in airfares, the largest July increase since the data collection for airfares moved to monthly.”
Services inflation continues to be a key factor in the overall rate and remains sticky, hitting 5%.
Meanwhile, food prices continue to rise at a level higher than overall inflation as suppliers and supermarkets account for higher labour and regulatory costs following the increase in national insurance contributions and the national living wage.
James noted that uncertainty remains on what impact US trade policy will have on the cost of goods in the UK, but given that tariffs are beginning to feed into the data globally, it is not likely to be helping the situation, she said.
“As a result, the stagflationary environment facing the UK is getting further embedded. Growth, albeit better than expected, is back to being anaemic. The labour market is showing signs of strain, while bond yields are picking up again.
“The UK faces a moment of reckoning this Autumn when Rachel Reeves will be forced to consider either her fiscal rules or her pledges not to raise taxes for working people, given the fiscal shortfall. Tax changes around the edges and lack of deeper spending cuts appear to simply not satisfy markets any longer.”
All of this makes it incredibly difficult to predict the path of interest rates, said James.
“The weak growth and fragile state of employment in the UK should enable the Bank of England to cut rates again at least once this year, but if inflation continues its march upwards and gets stuck at any point on the way back down, then policy decisions may need to be backtracked.”
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