Consumers: British institute sees risk of stagflation

With inflation skyrocketing, economists are warning of devastating consequences for the UK economy.

Consumers: British institute sees risk of stagflation

With inflation skyrocketing, economists are warning of devastating consequences for the UK economy. There is "the growing possibility of a deeper recession," wrote the independent economic research institute NIESR in a report published on Wednesday.

This will affect millions of people, especially financially weaker households, it said. For the first time since the 1970s, there is a risk of stagflation, i.e. a mixture of high inflation and unemployment as well as stagnating economic output.

The economy will grow 3.5 percent this year, but only 0.5 percent in 2023, the National Institute of Economic and Social Research (NIESR) estimates. About 2.5 million households would use up their savings due to the rising cost of living. This means that by 2024 every fifth household will have no more reserves. The number of households living from salary to salary will almost double to 6.8 million in 2024. That's 25 percent of the country.

This is also because, according to NIESR calculations, real wages will be permanently lower. This year alone they would fall by 2.5 percent and by 2026 they would be 7 percent below pre-coronavirus levels. The institute blamed the effects of Brexit and the rising prices for electricity and gas for this.

"All households face rising energy and food bills, but too many have to resort to borrowing, build up arrears or wipe out their savings," said NIESR Vice Director Adrian Pabst. His colleague Stephen Millard called on the British central bank to get inflation under control. A key interest rate of 3 percent would probably be necessary for this, Millard said. The future government must also provide even more relief for financially weak consumers, for example by increasing social assistance known as universal credit and granting further discounts on energy bills.

According to the institute, inflation will rise to almost 11 percent in the last quarter of this year, but will fall back to 3 percent by the end of 2023.