The Rolling Stones recently topped the charts with their 31st studio album, Hackney Diamonds. The number-one smash arrived 60 years after the band’s debut collection and more than 50 years since they reached the height of their powers with Sticky Fingers (1971) and Exile on Main Street (1972).
Now, half a century later, with the band back in the charts and still going strong, another less welcome 1970s mainstay is making a comeback.
Stagflation occurs at the point where high inflation, rising unemployment, and slow economic growth meet. It hit the UK hard in the 1970s with severe long-term consequences for the economy and individuals’ finances.
But is stagflation set to return to the UK and, if so, how can HDA help you mitigate its effects?
Keep reading to find out.
There’s a risk of stagflation going into 2024 as fears of recession persist
We know that for stagflation to occur, three important factors must align. Let’s take a look at each in turn.
1. High inflation
The Office for National Statistics (ONS) confirms that the Consumer Price Index (CPI) for the 12 months to October 2023 rose by 4.6%, down from a 6.7% stall in September and August.
Inflation, then, is falling – albeit from a 41-year peak of 11.1% in October 2022. It also remains well above the Bank of England’s (BoE) 2% target.
Amended forecasts from the Bank’s Monetary Policy Committee (MPC) confirm that they don’t expect CPI to fall back to 2% until the end of 2025 (pushed back from Q2 of that year), although October’s figure is promising.
2. High unemployment
The ONS confirmed in October that UK unemployment is low, but slowly rising. Its so-called “experimental estimates” for June to August 2023 confirm a 0.2 percentage point increase (to 4.2%) compared with the previous quarter.
UK employment rates, meanwhile, have suffered a 0.3 percentage point drop between Q2 and Q3.
High rates of unemployment are largely incompatible with low and stable inflation, which could prove a headache for the BoE in 2024.
The Institute for Fiscal Studies (IFS) forecasts that the situation could get worse. It expects unemployment to increase to between 5.5% and 6.0% by the end of 2024, adding to stagflation fears.
3. Slow economic growth
The IFS also has some predictions about the economy over the next 12 months or so. It predicts a moderate recession in the new year, with GDP falling by 0.7% before growing by 0.4% in 2025.
The Office for Budget Responsibility (OBR), meanwhile, is more optimistic, forecasting a cumulative increase of 1.6% over 2023 and 2024.
Slow, stagnant, or negative economic growth – combined with high inflation and rising unemployment – means that a period of stagnation could be imminent.
Some experts suggest “spikeflation” is on the way while most acknowledge that the full effects of interest rate hikes are still to come
Back in March, Money Marketing reported on the potential for a new era of “spikeflation”. The UK economy continues to recover post-pandemic, and with the cost of living crisis persisting, we know that inflation is predicted to keep falling.
But rather than returning to a prolonged period of low and stable inflation – as we saw in the three decades before Covid – we might see so-called “spikeflation”. If its proponents are to be believed, this would see relatively higher and more volatile inflation, with more frequent recessions.
Whether this prediction transpires, we can only wait and see. But the cost of living crisis, which has affected household budgets nationwide, will continue to affect millions of UK households in the new year and into 2025.
High inflation, slow growth, and the BoE’s decision to push interest rates higher (in an attempt to subdue inflation) have seen the cost of borrowing soar. This has been especially true for homeowners.
And while interest rates might now have peaked, the woes for borrowers certainly haven’t. This is because it takes time for interest rate hikes to trickle through into the wider economy.
Whatever happens over the next 12 months, focusing on your long-term goals remains key
It’s important to remember that the stock market isn’t the economy. Whatever happens over the next 12 to 18 months, your long-term goals remain your priority. That means staying focused and cutting out the noise of short-term volatility.
We check in with your investments regularly and are always on hand to offer reassurance that your plans remain on track, or to recommend a change (to asset allocation, for example) if we think one is needed.
That leaves you free to live in the moment, with confidence that your future is in safe hands.
Get in touch
If you’re worried about the effects of continued high inflation or the chances of a UK recession next year, we can help to provide reassurance and help you to stay focused on your goals. Please get in touch via email at enquiries@hda-ifa.co.uk or call 01242 514563.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
