06 MARCH 2025
There is a whiff of stagflation in the UK economy with inflation trending higher again despite stalling growth.
The chart below shows headline UK CPI (blue line) rising back to 3%y/y in January; comfortably below the pandemic peak of 11%y/y, but above the Bank of England’s (BoE) 2% target (the top horizontal line).
With energy prices rebounding and the recent tax hikes yet to fully filter through, CPI is likely to rise further over the coming months.
Price pressures are building elsewhere in the world, but mostly because aggregate demand is perking up. That isn’t the case in the UK, where GDP growth has all but ground to a halt. It came in at 1.4% y/y in Q4 (red line), but rose by just 0.1% in the final quarter.
With consumer and business activity struggling in the face of fiscal headwinds and continued cost-of-living pressures, UK GDP growth is likely to stall this year.
This puts the BoE in a bind.
The economy desperately needs lower borrowing costs, but the inflation rebound limits the scope for further rate cuts.
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