UK economy heading for ‘stagflation-lite’, IEA Economics Fellow says

Commenting on the rise in inflation to 3%, Julian Jessop, Economics Fellow at the free market think tank the Institute of Economic Affairs said:

“The jump in headline inflation to 3% in January adds to evidence that the UK is heading for ‘stagflation’ – a nasty combination of stagnating economic activity, rising inflation, and increasing job insecurity.

“This outbreak could still be mild by past standards, and so best described as ‘stagflation-lite’.

“3% inflation is still tolerably low, and there were some special factors last month including the volatility of air fares and some (hopefully) one-offs, including the extension of VAT to private school fees.

“There is some evidence too that firms are already passing on the increases in labour costs as a result of the Budget. This at least reduces the chances of a further jump in inflation when the national minimum wage and employers NI actually rise in April.

“Nonetheless, higher inflation will undermine two of the foundations of any recovery in consumer confidence and spending – rising real wages and hopes of further interest rate cuts.

“The renewed increase in food price inflation will be particularly worrying for households on lower incomes.

“Moreover, the Bank of England is now more likely to leave rates on hold again until May.

“In summary, not yet panic stations, but definitely some more bad news.”