UK problems with slow growth and rising prices seem likely to get worse

Britain’s bout of mini-stagflation continues as businesses face supply and demand constraints

Last modified on Mon 23 Aug 2021 08.50 EDT

Growth is slowing and price pressures are mounting. Consumers are anxious and an important commodity is in short supply. That was the state of the UK in the mid-1970s, when a single word was used to describe a combination of recession and a rising cost of living: stagflation.

And, in a much milder form, it is the malaise that is afflicting the economy today. The shortage is of computer chips rather than crude oil but the latest snapshot from IHS Markit/Cips suggests businesses face supply and demand constraints.

To be sure, an incurable optimist could put a decent gloss on the latest purchasing managers’ index. The economy is growing at a relatively healthy pace, firms are taking on more staff, and there are some signs that price pressures are abating.

The reality is much less upbeat. Activity, according to purchasing managers, has slowed for a third month and by more than was expected by a survey of economists. Reported incidents of output being curtailed by shortages of labour or materials are 14 times higher than usual and the highest since the PMIs were first produced in 1998.

That’s the supply problem. The demand problem is that Covid-19 has not gone away despite the warmer weather and the NHS vaccine programme. Case numbers are going up not down, and that’s making consumers nervous.

It is a classic double whammy. On the one hand, businesses are being forced to pay higher wages to plug labour shortages. On the other, demand is starting to ease. The economy will continue to grow at a fair lick in the third quarter of 2021 but at a much less rapid pace than the 4.8% seen in the second quarter.

That double whammy could easily become a triple whammy if the economy struggles to cope with the withdrawal of government support. Rishi Sunak has no intention of scrapping his plan to wind up the furlough scheme next month and sees no reason why he should, given record job vacancies.

But it is easy enough to envisage a scenario in which consumers decide eating out or a visit to the cinema is not worth the risk, especially with firms jacking up their prices to cover higher wage costs. Britain’s bout of mini-stagflation will probably get worse before it gets better.

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