Britain’s economic nightmare of the 1970s may be making a comeback

There has been talk of stagflation for months. Now this toxic combination of stagnant economic growth and high inflation seems to have reached the UK.

UK consumer price inflation rose to 5.1% in November, its highest level in more than a decade, according to the National Bureau of Statistics.

Prices are outpacing wage increases and posing a dramatic challenge for the Bank of England, which is battling a stagnant economy and a new outbreak of coronavirus infections.

November’s inflation reading was much stronger than the 4.7% economists had expected, and the highest since September 2011.

Record gasoline prices contributed significantly to the sharp rise in inflation. But retail prices for a wide range of products have also risen, including clothing, food, used cars, alcohol and tobacco, as well as books, games and toys.

Cost pressures show no signs of abating — prices for goods leaving factories in the UK rose by 9.1% in November, the highest rate of producer inflation in over 13 years.

And the shortage of workers has worsened over the past month, with vacancies reaching a new all-time high of nearly 1.2 million.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said inflation was likely to stay close to November’s rate for the next four months, before rising to 6% in April and dropping sharply.

Tombs said the inflation shock numbers are “uncomfortably high” for the Bank of England, which would normally respond to rising inflation by raising interest rates from a record low of 0.1%. On Thursday (16), the British central bank raised its benchmark interest rate to 0.25%.

Higher official interest rates can increase the cost of borrowing for businesses and families, as well as encourage people to save more, thus helping to reduce inflation.

But they could also take some of the heat off the economy, and the rapid spread of the Omicron coronavirus variant could force the central bank to hold fire until it can assess the damage.

“The rapid rise in inflation over the past four months is unlikely to lead to [o banco central] to raise interest rates this week, given that the full extent of the economic damage caused by Ômicron is still unknown,” Tombs said.

Rising inflation is bad news for British workers, who saw wages rise sharply during the recovery from the first waves of the coronavirus, but are now facing the shock in stores.

Early estimates suggest that median monthly compensation increased 4.7% in November from a year earlier — less than the 5.1% inflation rate. Many employees will also be hit by tax increases in early 2022.

Brian Reading — economic adviser to former UK Prime Minister Edward Heath in the 1970s, the last time Britain experienced a prolonged period of stagflation — warned in October that the country faced a dangerous time with a shortage of and with the increasing demand of public sector employees and retirees for benefits to make up for lost income.

“Price inflation is gaining momentum,” he wrote in a commentary to economic policy think tank OMFIF. “Now it all depends on whether this triggers a spiral of total depreciation of wages, prices, pensions, taxes and pounds sterling.”

Inflation is now more than twice the level of the Bank of England’s 2% target, while economic growth is slowing.

UK GDP grew just 0.1% in October, with output still 0.5% below pre-pandemic levels.

While economists expect inflation to ease in the second half of next year, there is some evidence of “more persistent price pressures,” according to Paul Dales, chief UK economist at Capital Economics.

“The further acceleration in core producer price inflation suggests that increases in global costs and the influence of product shortages are still increasing price pressures particularly in the inflation pipeline,” he said.

Still, Dales expects the Bank of England to wait for more information before raising interest rates.

“Inflation is close to being even further above the target than at any time since the UK began targeting inflation in October 1992. This makes tomorrow’s interest rate decision seem closer , but overall we think the Bank of England tends to keep rates at 0.10% until they learn more about Omicron’s situation,” he said.

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