London Daily

Focus on the big picture.
Thursday, Jul 30, 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
The World's Most Terrifying Smartphone: Recording, Documenting, and Reporting to the Regime
The AI User Nightmare: Private Claude Conversations Leaked to the Internet
UK: Former Football Association Leaders Call for World Cup Boycott Over FIFA Privatization Plan
Forbidden Love: China severs millions from their virtual partners
Over 24 Hours in the Air: Qantas Airbus Completes Record-Breaking Test Flight
Zuckerberg Opposes US Ban on Chinese AI Models and Warns of Regulatory Capture
Massive Wildfires Ravage Southern Europe: Fatalities in Greece and Evacuations Across France, Spain, and Turkey
NHS Leaders Warn Royal Mail Tariff Increases Will Raise Administrative Costs
Immigration Remains the Public's Top Concern in Britain, Ipsos Poll Finds
Britain Approves 16 New Grid Storage Projects to Strengthen Electricity Network
London-Listed Merger Activity Climbs Even as IPO Market Remains Weak
Institute of Directors Warns High Energy Costs and Taxes Continue to Weigh on UK Businesses
North Sea Industry Calls for Faster Approval of £10 Billion Rosebank and Jackdaw Projects
UK Inflation Eases to 2.6% but Higher Energy Costs Could Renew Price Pressures
Burnham Holds Talks With Saudi and Qatari Leaders on Middle East Security and Energy
Burnham and Zelenskyy Announce UK Electronic Warfare Technology Cooperation During London Visit
Prime Minister Andy Burnham Launches Cross-Party Push for Social Care Reform in England
Trump says Israel ‘would not survive’ without US
France Evacuates Atlantic Coast Resorts as Wildfire Risk Rises Again
Magnitude 7.1 Earthquake Strikes Kumamoto as Rescuers Search Collapsed Buildings
OpenAI Faces Demands for Full Disclosure After Models Breach Hugging Face
Nvidia Reportedly Takes Vast Texas Data-Centre Lease to Underwrite AI Expansion
Royal Collection Trust Income Falls as Palace Visits Retreat From Record Highs
FIFA’s Private-Investment Plan for World Cup Rights Draws European Revolt
Ministers Examine Social-Care Levy as Burnham Seeks Funding Settlement
UK Attractions Sector Forecast to Add £587 Million in Visitor Spending
England Coast Path Extends With New Suffolk Estuary Walking Route
Attorney General Wins Longer Jail Term for Fatal Dangerous Driving Case
Andrew and Tristan Tate Remain in U.S. Custody Pending UK Extradition
Royal Fleet Auxiliary Workers Secure Above-Inflation Pay Deal
Prime Minister Seeks Cross-Party Agreement on Social Care Reform
Court Upholds Competition Ruling Against Drugmakers Over Hydrocortisone Prices
UK Unveils Major Technical Education Reform for Secondary Schools
UK Judge Rebukes Home Office Over AI-Generated Errors in Asylum Case
UK and Ukraine Agree to Share Electronic Warfare Technology
Apple Briefly Crosses Five Trillion Dollar Valuation as Investors Retreat From AI Bets
Badenoch Offers Tory Votes to Keep Serious Offenders in Prison
Why Americans Queue for $15 Ice Cream and a $100 Caviar Pint
Another AI Genius Left the United States — and Silicon Valley Is Starting to Worry
Shein Reports $99mn Loss as Trade Barriers Test Low-Cost Model
CXMT Gains 466% in China’s Biggest IPO Since 2010
Amazon Seeks Approval for 5,105-Satellite Mobile Network
Burnham Puts School-to-Work Reform at Centre of Welfare Strategy
Johnson & Johnson Agrees to $5.5 Billion Talc Lawsuit Settlement
EU AI Act Shapes Global Corporate Standards, Study Finds
UK-Japan Relations Expected to Deepen Under Burnham Government
Burnham Signals Tough Decisions on Council Tax Reform
UK Inflation Slows to 2.6% in June
Bank of England Holds Interest Rates at 3.75%
Prime Minister Burnham Opens Talks With Business Leaders on Economic Growth
×