Recent economic data from the UK indicates an undeniable upward trend in prices, raising concerns among analysts and policymakers alike. The most recent figures further emphasize that persistent services inflation is now up to a 5% annualized pace. This underlying stagflationary inflationary pressure is an indication that the economy is experiencing some of the adverse effects usually linked with stagflation.
This new data comes just as hopes for a future rate cut have started to dissipate. After all, many analysts had expected a rate cut to boost economic growth and relieve the economy of its inflation pressures. The ongoing inflation surge has changed that dynamic, leading to a dramatic shift in the outlook for monetary policy and strategy.
As we’ve warned, sticky services inflation is getting worse. Cost of living prices for basic needs including healthcare and education, child care, and even summer camps and recreational activities are all on the rise. For the rate to jump to 5% now suggests that consumers can expect to face much longer-term elevated costs in their everyday lives. This inflationary trend is especially pernicious because it can cut into disposable income and consumer spending more generally.
Economists have cautioned that the effects of increasing sticky services inflation go beyond just higher prices. It would result in long-term economic distress if people’s wages stay behind the curve with inflation. While families find it increasingly difficult to make ends meet, businesses will soon be facing similar pressures, affecting jobs and capital investment decisions.
The data leaves no doubt that prices are going up. This growth isn’t merely a short-term blip, it’s a more systemic problem based in the underlying economy. Inflation pressure remains hot inside the services sector. As this puts more pressure on the Bank of England to re-evaluate its strategy on interest rate hikes, we explain why. To do so, policymakers must adopt firm measures to counteract these inflationary pressures, while avoiding steps that would overly inhibit economic expansion.