Economic Briefing Report: Risk of stagflation heightening
The economic horizons appear to be improving for the UK, at least in the resilience of the consumer in the face of double-digit inflation. A technical recession is expected to be avoided this year, though economic output is likely to broadly stagnate in any case.
Stubbornly high (though decreasing) inflation will weigh on economic activity over the coming quarters, hitting consumer spending in relatively higher energy and grocery bills, as well as housing costs. We expect inflation to steadily decrease over the course of the year, but it is likely to remain above 4% by the end of the year. The timelier BRC-NielsenIQ Shop Price Index (SPI) suggests that food inflation is persisting, with further increases in prices seen month-on-month, which will slow down the eventual fall in inflation.
Business activity (as measured by the Purchasing Managers’ Index) continued to expand into April, underpinned by strong services demand. This, however, comprised of a shift away from goods consumption towards intangible (e.g. financial) services, highlighting divergent performance within the sector. A further interest rate hike is expected at the Bank of England’s upcoming meeting, next week. The risk of further tightening to subdue persistent inflation has increased, but our central expectation remains that rates will be held higher for longer, before being unwound as weakness in the labour market materialises.Harvir Dhillon, Economist at the British Retail Consortium