London Daily

Focus on the big picture.
Sunday, Dec 28, 2025

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
UK Plans Royal Diplomacy with King Charles and Prince William to Reinvigorate Trade Talks with US
King Charles and Prince William Poised for Separate 2026 US Visits to Reinforce UK-US Trade and Diplomatic Ties
Apple Moves to Appeal UK Ruling Ordering £1.5 Billion in Customer Overcharge Damages
King Charles’s 2025 Christmas Message Tops UK Television Ratings on Christmas Day
The Battle Over the Internet Explodes: The United States Bars European Officials and Ignites a Diplomatic Crisis
Princesses Beatrice and Eugenie Join Royal Family at Sandringham Christmas Service
Fine Wine Investors Find Little Cheer in Third Year of Falls
UK Mortgage Rates Edge Lower as Bank of England Base Rate Cut Filters Through Lending Market
U.S. Supermarket Gives Customers Free Groceries for Christmas After Computer Glitch
Air India ‘Finds’ a Plane That Vanished 13 Years Ago
Caviar and Foie Gras? China Is Becoming a Luxury Food Powerhouse
Hong Kong Climbs to Second Globally in 2025 Tourism Rankings Behind Bangkok
From Sunniest Year on Record to Terror Plots and Sports Triumphs: The UK’s Defining Stories of 2025
Greta Thunberg Released on Bail After Arrest at London Pro-Palestinian Demonstration
Banksy Unveils New Winter Mural in London Amid Festive Season Excitement
UK Households Face Rising Financial Strain as Tax Increases Bite and Growth Loses Momentum
UK Government Approves Universal Studios Theme Park in Bedford Poised to Rival Disneyland Paris
UK Gambling Shares Slide as Traders Respond to Steep Tax Rises and Sector Uncertainty
Starmer and Trump Coordinate on Ukraine Peace Efforts in Latest Diplomatic Call
The Pilot Barricaded Himself in the Cockpit and Refused to Take Off: "We Are Not Leaving Until I Receive My Salary"
UK Fashion Label LK Bennett Pursues Accelerated Sale Amid Financial Struggles
U.S. Government Warns UK Over Free Speech in Pro-Life Campaigner Prosecution
Newly Released Files Shed Light on Jeffrey Epstein’s Extensive Links to the United Kingdom
Prince William and Prince George Volunteer Together at UK Homelessness Charity
UK Police Arrest Protesters Chanting ‘Globalise the Intifada’ as Authorities Recalibrate Free Speech Enforcement
Scambodia: The World Owes Thailand’s Military a Profound Debt of Gratitude
Women in Partial Nudity — and Bill Clinton in a Dress and Heels: The Images Revealed in the “Epstein Files”
US Envoy Witkoff to Convene Security Advisers from Ukraine, UK, France and Germany in Miami as Peace Efforts Intensify
UK Retailers Report Sharp Pre-Christmas Sales Decline and Weak Outlook, CBI Survey Shows
UK Government Rejects Use of Frozen Russian Assets to Fund Aid for Ukraine
UK Financial Conduct Authority Opens Formal Investigation into WH Smith After Accounting Errors
UK Issues Final Ultimatum to Roman Abramovich Over £2.5bn Chelsea Sale Funds for Ukraine
Rare Pink Fog Sweeps Across Parts of the UK as Met Office Warns of Poor Visibility
UK Police Pledge ‘More Assertive’ Enforcement to Tackle Antisemitism at Protests
UK Police Warn They Will Arrest Protesters Chanting ‘Globalise the Intifada’
Trump Files $10 Billion Defamation Lawsuit Against BBC as Broadcaster Pledges Legal Defence
UK Says U.S. Tech Deal Talks Still Active Despite Washington’s Suspension of Prosperity Pact
UK Mortgage Rules to Give Greater Flexibility to Borrowers With Irregular Incomes
UK Treasury Moves to Position Britain as Leading Global Hub for Crypto Firms
U.S. Freezes £31 Billion Tech Prosperity Deal With Britain Amid Trade Dispute
Prince Harry and Meghan’s Potential UK Return Gains New Momentum Amid Security Review and Royal Dialogue
Zelensky Opens High-Stakes Peace Talks in Berlin with Trump Envoy and European Leaders
Historical Reflections on Press Freedom Emerge Amid Debate Over Trump’s Media Policies
UK Boosts Protection for Jewish Communities After Sydney Hanukkah Attack
UK Government Declines to Comment After ICC Prosecutor Alleges Britain Threatened to Defund Court Over Israel Arrest Warrant
Apple Shutters All Retail Stores in the United Kingdom Under New National COVID-19 Lockdown
US–UK Technology Partnership Strains as Key Trade Disagreements Emerge
UK Police Confirm No Further Action Over Allegation That Andrew Asked Bodyguard to Investigate Virginia Giuffre
Giuffre Family Expresses Deep Disappointment as UK Police Decline New Inquiry Into Andrew Mountbatten-Windsor Claims
Transatlantic Trade Ambitions Hit a Snag as UK–US Deal Faces Emerging Challenges
×