A woman pushing a baby in a pram passes by Barclays cash points, both boarded up and vandalised by graffiti. (Photo: Daniel Harvey Gonzalez via Getty Images)
The Office for National Statistics has confirmed that the rate of inflation has now risen to 9% – the highest for 40 years.
The surge prompted business leaders to warn “unprecedented” inflation could spark a recession later in the year, and comes almost two weeks after the Bank of England issued a stark warning to British people that the economy is at risk of slipping into a recession when it raised interest rates to 1%.
The central bank’s hike – by a quarter of a percentage point – meant the base rate is at a level last seen in 2009. The move was designed to curb the soaring cost of goods and services – known as inflation.
While effectively putting the brakes on spells bad news for people borrowing money, with mortgage holders likely to feel the immediate impact, it was largely predicted – and could be followed by more increases.
The biggest shock came in the warning of a recession – a word that sends alarm bells ringing for many – as the Ukraine war compounds a crippling cost-of-living crisis.
What is a recession?
A technical recession is defined by two successive quarters of falling economic output – measured by gross domestic product (GDP), which attempts to summarise all the activity of companies, governments and individuals in an economy in a single figure.
Some people argue the term “recession” is an unreliable indicator because people could be suffering all the effects of an economic downturn, such as long-term unemployment, but the data might not be officially say as much.
UK interest rates since 2007. (Photo: PA Graphics via PA Graphics/Press Association Images)
For instance, a “double-dip recession” is when a recession is followed by a short-lived recovery and another recession, but people’s lives do not feel much different throughout that period.
Recessions ultimately have an impact on living standards, but the full effect largely depends on the scale of unemployment and how long it takes for businesses and the jobs market to recover.
What’s the outlook?
Earlier this month, the Bank predicted that growth will contract in the final three months of 2022 as the cost squeeze sees households rein in their spending.
The UK is set to narrowly miss a technical recession, but the Bank forecast “very weak” quarterly growth in 2023 and a contraction as a whole next year. They predict GDP will fall by 0.25% and unemployment will pick up sharply.
“It is a very weak projection, a very sharp slowdown,” Bank governor Andrew Bailey told reporters.
“There’s a technical definition of a recession it doesn’t meet – but put that to one side – it is a very sharp slowdown in activity.”
- UK now heading for a recession, with GDP forecast to contract at the end of this year.
- Double digit inflation of just over 10% forecast later this year - highest since 1982
- Bank raises interest rates to 1%, highest level since 2009
— Ed Conway (@EdConwaySky) May 5, 2022
When was the last recession?
Not that long ago.
In 2020, the Office for National Statistics officially declared the UK in recession – the steepest on record – after the economy plunged by 19.6% between April and June due to the coronavirus lockdown.
It followed a 2.2% contraction in the previous three months – marking the first time since the 2008 global financial crisis, when the UK fell into a year-long recession.
But this was followed by growth of 17.4% in the third quarter of 2020 – underlining how the economy was lurching from one extreme to another during the early stages of the pandemic.
What is fuelling a potential recession?
The world is being buffeted by a unique set of circumstances.
Inflation is surging as a result of the easing of the pandemic. It means the costs of goods and services have become more expensive because of a number of factors – such as the scarcity of workers unwilling to do jobs they previously had, and pent-up demand from consumers.
Economists believed this was a big problem as the cost of life’s expenses was growing faster than people’s wages, but that would only be temporary. Then Russia invaded Ukraine, which sent energy prices spiralling given the world’s reliance and oil and gas from the region.
The Bank has said it was also worried about the impact of renewed Covid-19 lockdowns in China which threaten to hit supply chains again and add to inflation pressures.
Bailey sent further shockwaves across the UK when he warned that food prices could reach “apocalyptic” levels on Tuesday, and admitted he is helpless in the face of global pressures including a spike in energy costs and the Ukraine war.
What is ‘stagflation’?
Economists think the Bank is walking a tightrope to avoid an economic “perfect storm” called stagflation – a contradictory situation where costs are rising but fewer people are in work. The worst of all worlds.
Raising interest rates might help to combat inflation, but that could mean the economy stalls. Using interest rates could be a particularly blunt instrument when the inflationary pressures are coming from overseas with higher energy costs.
The risk is this: more nudges by way of further interest rate hikes could be the catalyst for a full-blown recession.
This article originally appeared on HuffPost UK and has been updated.