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, the inflation levels may cross the 7%-mark next month, heavily breaching
its 2% target. To offset the effect of rising inflation, the bank is going for interest
rate hikes. After two consecutive rate hikes in December and February, the Bank of England
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.
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.
According to the latest labour market overview for the last quarter released by the Office
for National Statistics 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.
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.
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.