over 1 year ago • 2 mins
UK inflation just reached its highest level since 1982, with consumer prices 9.4% up on the same time last year. And since they’re rising so much faster than wages, Brits’ budgets are being squeezed to breaking point.
There’s no doubt this is going to take its toll on the UK economy: it’s forcing consumers to spend less, which will slow down economic growth in the process. At the same time, it’ll force the Bank of England (BoE) to hike interest rates more aggressively than it normally would in such a slow growth environment, which will drag on the economy even more. In short, a recession is looking more likely by the day.
Then there’s the possibility that inflation will just keep spiraling. Rising costs – both of salaries and raw materials – could force companies to continue to jack up their prices, which would put even more of a burden on consumer spending and economic growth. Consider too that the country’s energy bills are set to rise yet again when the government lifts the price cap in October. Put those factors together, and the BoE is expecting inflation to hit 11% later in the year – and that’s with the gung-ho hiking campaign it has planned.
This might force the central bank to up the ante even more, in hopes it’ll finally slow down the economy enough to limit rising prices. But even if it does, it won’t happen overnight. And in the meantime, British investors will be left to deal with the unfriendly environment of “stagflation” – a combination of slower growth and high inflation that’s particularly bad for risky assets like stocks. So even though stock prices seem to be recovering, you’ll want to stay defensive – think high-quality stocks in defensive industries – until the UK is well and truly in the clear. Whenever that is…
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