Brutal inflation amid low growth is evoking the specter of the 1970s "British disease." With both internal and external factors shaking the UK economy, there are forecasts that 1970s-style stagflation (economic stagnation amid high inflation) could occur.
On the 29th (local time), major foreign media reported that as record-high and persistent inflation and soaring living costs continue to afflict the public, the UK government's struggle to control the situation is ongoing.
Recently, the UK Office for National Statistics announced that the annual inflation rate for April was 8.7%. Although this was a slowdown compared to the previous month (10.1%), it exceeded market expectations (8.2%) and the Bank of England's (BOE) forecast (8.4%), showing a sluggish recovery.
With rising living costs due to high housing expenses, household living costs, and food prices, service sectors heavily influenced by demand, such as restaurants and hotels, also showed significant increases. In particular, food and beverage prices continued a high ascent with a 19.1% increase. The US economic media outlet CNBC pointed out that the UK's April food and beverage inflation rate was the second highest in 45 years.
UK inflation is nearly 2 percentage points higher than the Eurozone average (7%) among the 20 countries using the euro. Alan Monk, an economist at JP Morgan specializing in the UK economy, said, "It is very surprising that UK inflation exceeds the Eurozone average," and forecasted, "Persistently high prices will prompt the BOE to raise its base interest rate further."
The UK economy is facing multiple crises, including government spending cuts, high interest rates, and a worsening cost-of-living crisis due to tax increases. The UK showed relatively poor recovery from the COVID-19 pandemic compared to other European countries. On top of this, former UK Prime Minister Liz Truss's reckless tax cut plan last September increased borrowing costs for businesses and households, dragging the economy into a growth slump. With high interest rates, consumption, which drives the UK economy, is unlikely to improve soon, and businesses are also insufficient to lead growth.
Another factor fueling pessimism about the UK economy is the weakening of its fundamentals due to Brexit (the UK's withdrawal from the European Union). The increased costs resulting from restricted free movement of people (labor) and goods between the UK and the EU are further intensifying inflationary pressures.
Sandra Horsfield, a UK economist at Investec, pointed out, "The likelihood of a 1970s-style stagflation era, characterized by persistent high inflation amid low growth, is increasing."
As inflation remains stubbornly high, the market is anticipating further tightening by the BOE. She predicted, "The BOE will raise interest rates by an additional 0.25 percentage points next month, bringing the base rate to 4.75%." The market expects the base interest rate to rise to 5.3% by the end of the year, reflecting further tightening.
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