London Daily

Focus on the big picture.
Wednesday, Feb 25, 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
Lord Mandelson Condemns Arrest as Driven by ‘Baseless Suggestion’ He Would Flee Abroad
Former UK Ambassador Released on Bail Following Arrest in Epstein-Linked Investigation
UK Parliament Orders Release of Former Prince Andrew’s Government Vetting Files
Reddit Fined £14 Million by UK Regulator Over Failures in Age Verification Controls
UK Moves to Tighten Regulation of Netflix, Disney+ and Prime Video Under New Media Rules
British Woman Who Reported Rape in Hong Kong Faces Possible Prosecution
'Christianity is the religion that has made this country great.'
Man Receives Parking Ticket 38 Years After Offense: ‘City Officials Said It’s Legitimate’
Woman Receives Gift Card for Christmas – Discovers It Is ‘Worth’ 63,000,000,000,000,000 Pounds
UK Sanctions New Zealand Insurer Maritime Mutual Following Allegations Over Russian Oil Cover
Reform MP Danny Kruger Condemns UK’s ‘Unregulated Sexual Economy’ in Call for Tougher Controls
The Show Must Go On: Prince William and Kate Middleton Shine at the BAFTAs Amid Andrew’s Arrest
UK Sanctions Russian ‘Illicit Oil Traders’ After Email Blunder Exposes Sanctions Evasion Network
Russia Amplifies Baseless Claims That UK and France Plan to Arm Ukraine with Nuclear Weapons
UK Imposes Sanctions on Two Georgian Television Channels Over Alleged Russian Disinformation
United States National Parks See Noticeable Drop in Visitors from Canada, U.K. and Australia
UK, Australia, Canada and New Zealand Escalate Sanctions on Russia as Ukraine War Marks Four Years
I Gave Andrew a Nude Massage Inside Buckingham Palace
UK Economy Faces Acute Strain as Trump’s Global Tariff Reshapes Trade Landscape
UK Signals Retaliation Is Possible as New US Tariff Policy Threatens Trade Stability
British Police Arrest Former Ambassador Peter Mandelson in Epstein-Related Misconduct Probe
Australia Officially Supports Proposal to Remove Andrew Mountbatten-Windsor from Royal Succession
Victorian Premier Jacinta Allan remains silent on ISIS brides' resettlement plans in Melbourne
Former UK Ambassador Peter Mandelson Arrested in Connection with Jeffrey Epstein
Jacob Rees Mogg afraid to talk about Peter Mandelson arrest on “suspicion of misconduct in a public office” (Pedophilia, corruption, etc.)
United Nations Calls for Global Action Against Disinformation and Hate Speech Online
Tucker Carlson warns of an inevitable clash in Western societies over mass migration
President Trump warns countries against abandoning recent trade deals with the US
Diverging Polls Show Mixed Signals on UK Economic Revival as Confidence Remains Fragile
Spotify Expands AI-Driven ‘Prompted Playlists’ Feature to the United Kingdom and Other Markets
Greens and Reform UK Surge in Manchester By-Election, Threatening Labour’s Historic Stronghold
UK Businesses Push for Closer European Trade Links Amid Renewed US Tariff Uncertainty
Deloitte Global Overhaul Sparks Leadership Contest in the United Kingdom
University of Kentucky and Microsoft to Showcase Campus-Wide AI Innovation
UK Food System Faces Acute Vulnerability to Shocks, Experts Warn
Reform UK’s Proposed ICE-Style Deportation Scheme Triggers Sharp Backlash
U.S. Global Tariff Push Leaves Britain, Australia and Others Facing Higher Costs and Trade Strain
UK Police Officers Guarded 2010 Epstein Dinner Attended by Prince Andrew, Reports Say
US Trade Representative Affirms Commitment to Existing Tariff Agreements with UK and Other Partners
Activists at the Louvre hung a framed Reuters photograph of Andrew Mountbatten-Windsor slumped in the back of a car leaving a police station on the day of his arrest
The royal biographer said that he expected the police to 'look at the money trail' - including Sarah Ferguson borrowing money from Epstein
A Protestor screams in NYC: “Bill Gates is on the Epstein’s List…”
FBI and Secret Service Hold Press Conference After Shooting Incident at Mar-a-Lago
Mark Zuckerberg Testifies in Trial Over Social Media's Impact on Children's Mental Health
Maggie Oliver exposes Keir Starmer using letters to close child rapists investigations
Kouri Richie's wrote a children’s book to help her sons grieve the death of their father. Now she’ll stand trial for his murder
New York Braces for Major Snowstorm With Up to 18 Inches Forecast and Blizzard Warnings Issued
Mexican Military Kills CJNG Leader Nemesio Oseguera Cervantes as Violence Erupts Across Jalisco
Metropolitan Police Deploys Palantir-Powered AI to Flag Potential Officer Misconduct
UK Parliament Rebukes Police Over Ban on Israeli Football Fans
×