Supply chain disruptions and worker shortages are hampering Britain’s economic recovery. GDP growth slowed sharply in July, posting its smallest monthly increase since February, the ONS said last week.
A ‘whiff’ of stagflation
The economy remains 2.1% smaller than before the pandemic and economists at Berenberg now expect it to make a full recovery in the second quarter of 2022 instead of the first.
If prices continue rising, there is a risk that stagflation occurs, according to Berenberg senior economist Kallum Pickering, a phenomenon characterized by stubbornly high inflation and weak economic growth.
“The recent batch of UK data showing record labor demand and surging wages, rising inflation but weaker-than-expected real GDP growth has a whiff of stagflation to it,” Pickering said in a research note on Wednesday. “While the risk of such an outcome remains low, in our view, it puts the [Bank of England] in a tricky position nonetheless,” he added.
The unexpectedly sharp increase in inflation could force the Bank of England to hike interest rates sooner than anticipated, Pickering said.
The spike in UK inflation follows data out Tuesday showing that the rate of inflation in the United States slowed slightly in August as some price distortions eased, such as for used cars. But prices remain elevated across the economy amid persistent supply chain bottlenecks.
“There are too many reasons to expect supply shocks in other areas to be confident inflation isn’t going to settle at [a] slightly uncomfortable level for a sustained period,” Societe Generale strategist Kit Juckes said in a note on Wednesday.