London Daily

Focus on the big picture.
Thursday, Nov 05, 2026

UK economy faces double threat of inflation surge, recession risk

UK economy faces double threat of inflation surge, recession risk

Britain's economy is struggling under the strain of two major risks in the form of double-digit inflation and a possible recession, leaving the Bank of England in a dilemma about how much further it should raise interest rates.

The BoE has raised borrowing costs five times since December and its next scheduled rates announcement is on Aug. 4.

The central bank has said it will act "forcefully" - in other words, increase rates more steeply - if inflation pressures turn more persistent. But it also expects almost no economic growth over the next three years.

Below is a summary of the conflicting challenges facing BoE Governor Andrew Bailey and his colleagues and finance minister Rishi Sunak.

INFLATION AND INFLATION EXPECTATIONS


Consumer prices leapt by 9.1% in the 12 months to May, the most in 40 years, and the BoE has forecast that inflation will top 11% in October when energy bills go up again.

The BoE says there is little it can do to stop inflation in the short term and its priority is to stop the jump in prices from pushing up longer-term inflation expectations, which would make the problem much harder to fix.

One of the most widely watched measures of inflation expectations - the Citi/YouGov poll - increased sharply in recent months but has shown signs of stabilising or falling.

PAY INCREASES PICK UP PACE


The main way that higher inflation expectations could become embedded in the economy would be through higher pay deals.

Workers' salaries have been growing more quickly than usual, mostly because of one-off bonuses paid by employers in an effort to retain and recruit staff amid a severe shortage of candidates to fill vacancies.

Total pay, which includes bonuses, grew by almost 7% in the most recent official figures for the three months to April, up from about 3% shortly before the COVID-19 pandemic. Regular pay has increased just over 4%.

Both measures are lagging behind inflation, representing a cut in the real income of most workers.

Separate figures from XpertHR, a pay and personnel data publisher, show annual pay rises agreed at British workplaces steadying at a historically high rate.

VACANCIES AND WORKER SHORTAGE


A combination of the pandemic and Brexit has left Britain's employers in many sectors facing an acute shortage of staff, another worry for the BoE as this adds to pay pressures.

The official measure of vacancies has hit record highs month after month although the pace of increases has slowed, one of several signs that the inflationary heat in the jobs market has started to cool.

The BoE is also watching how many people remain outside the jobs market. This inactivity rate has edged down, contributing to the first rise in the headline unemployment rate since late 2020 in the most recent figures, potentially easing the inflation pressure in the jobs market.

RECOVERY STALLING


Normally, a jump in inflation would reflect strong growth in the economy, but not this time.

Prices were already rising around the world as the global economy struggled to reopen after coronavirus lockdowns, and Russia's invasion of Ukraine has compounded the problem by pushing up energy and food prices further.

Britain's economy contracted in April and March and showed zero growth in February, the first time since the start of the pandemic that it failed to grow in a three-month period. It is about 5% below the size it would have been had the pandemic not happened.

Things look set to get worse with the Organisation for Economic Co-operation and Development forecasting that Britain will show zero economic growth in 2023, the weakest performance all its member countries, bar sanctions-hit Russia.

Finance minister Sunak in May increased the government's support for households struggling with the rising cost of living and he is under pressure to do more later this year.

Newsletter

Related Articles

0:00
0:00
Close
Department for Business and Trade Overhauls Protection Standards for Digital Animation and Moving Image Files
Intellectual Property Office Introduces Thirty-Month Grace Period for International Product Launches
Intellectual Property Office Targets Anti-Competitive Filings With New Powers to Verify Novelty Before Registration
Creative Industries Minister Ian Murray Praises Regulatory Reforms to Safeguard Small Businesses and Micro-Enterprises
Government Unveils Major Design Framework Overhaul to Protect British Creators and Boost Economy
Global Asset Management Reports Surge in British Dividend Payouts Driven by Strong Financial and Mining Sectors
HM Treasury Confirms Strongest Group of Seven Growth Figures as Fiscal Consolidation Plans Progress
Department for Energy Security and Net Zero Approves Construction of New North Sea Offshore Wind Hub
Northern Ireland Executive Finalizes Public Sector Pay Agreements Following Months of Inter-Agency Negotiations
Welsh First Minister Eluned Morgan Secures Cross-Party Support for Regional Clean Energy Infrastructure Bill
Competition and Markets Authority Launches Formal Investigation Into Dominant Artificial Intelligence Cloud Partnerships
United Kingdom Foreign Secretary David Lammy Concludes High-Level Diplomatic Mission to Washington and Ottawa
Scottish Government Announces Emergency Housing Investment Package to Address Escalating Urban Homelessness
Chancellor Rachel Reeves Finalizes Corporate Tax Adjustments Ahead of Upcoming Business Investment Summit
National Health Service England Unveils Emergency Winter Resilience Plan to Combat Projected A&E Overcrowding
Bank of England Monetary Policy Committee Votes to Hold Base Interest Rate Steady at Four Point Seven5 Per Cent
UK Gross Domestic Product Expands by Zero Point Four Per Cent in Third Quarter Driven by Resilient Services Growth
Northern Ireland Executive Agrees on Multi-Year Public Sector Pay Restructuring Framework at Stormont
Department for Transport Confirms Acceleration of Electric Vehicle Charging Infrastructure Rollout Along Strategic Motorways
Welsh Government Announces Emergency Funding Package to Support Agricultural Sector Facing Severe Weather Impacts
High Court Rules in Favor of Environmental Coalition Over Government Carbon Reduction Plan Deficiencies
Office for National Statistics Reports Stable Retail Sales Growth Supported by Strong Digital Commerce Volumes
Scottish First Minister John Swinney Secures Cross-Party Support for Renewable Energy Export Expansion
National Health Service Digital Reports Major Breakthrough in Reducing Elective Waiting Lists Across England
Chancellor Rachel Reeves Outlines Infrastructure Spending Reforms to Boost Regional Economic Growth Across Northern England
Bank of England Holds Baseline Interest Rate at Five Percent Amid Persistent Core Inflation Pressures
House of Lords Advances Representation of the People Bill to Modernize Electoral Law Ahead of General Election
Financial Markets and Private Equity Assess Tax and Corporate Realignment Following Recent Chancellor Budget Adjustments
Justice Committee Warns Legal Aid Is a Service in Managed Decline Due to Inadequate Government Funding Responses
Royal Navy Intercepts Russian Intelligence Vessel and Warships Across Intensive North Sea Operations
Business and Trade Committee Slams Government Policy on China as Fragmented and Lacking Strategic Direction
Home Secretary Shabana Mahmood Softens Immigration Plans Following Intensive Cabinet Backlash Over Settlement Timelines
Automotive Industry Data Reveals Continued Acceleration in Battery Electric Vehicle Registrations Across British Dealerships
High Court of England and Wales Rules on Landmark Legal Challenge Regarding Local Government Housing Mandates
Department for Energy Security and Net Zero Approves Expanded Offshore Wind Infrastructure Along Scottish Coastline
Competition and Markets Authority Launches Broad Investigation Into Artificial Intelligence Infrastructure and Cloud Partnerships
United Kingdom and European Union Launch High-Level Preparations for Bilateral Defense and Security Summit in Brussels
National Health Service England Unveils Emergency Workforce Reforms to Alleviate Winter Accident and Emergency Pressures
Chancellor Rachel Reeves Finalizes Autumn Budget Adjustments to Meet Fiscal Rules and Fund Public Services
Bank of England Prepares for Interest Rate Decision Amid Rising Bond Yields and Inflationary Pressures
House of Lords Begins Detailed Legislative Scrutiny of Representation of the People Bill and Cyber Security Laws
Metropolitan Police Detain More Than Three Hundred Individuals Following Large-Scale Demonstration Outside London Embassy
Home Office Prepares Stricter Residency Rules Requiring Vulnerable Migrants to Wait Decade for Settlement Rights
Professional Mental Health Bodies Demand Statutory Regulation for Counsellors and Psychotherapists
National Grid Confirms Construction of Britain's Largest Electrical Substation to Power Teesside Data Centre
Prime Minister Keir Starmer Travels to Samoa for Commonwealth Summit Amid Debates on Economic Cooperation and Reparations
Home Office Implements Enhanced Digital Border Controls and Visa Processing Systems at Major Airports
Office for National Statistics Reports Stable Employment Participation Rates Across Regional Labor Markets
Department for Business and Trade Announces Strategic Partnership to Secure Critical Mineral Supply Chains
Scottish Government Unveils Regional Economic Development Strategy to Boost Advanced Manufacturing in Glasgow and Dundee
×