Spectre of ‘stagflation’ looms over UK economy

The UK economy is in real danger of undergoing a period of “stagflation” as prices soar and growth slows to a snail’s pace, according to a closely watched survey released today.

The latest IHS Markit / CIPS UK composite output index dropped to 54.1 in September, down from August’s reading of 54.8.

Chris Williamson, chief business economist at IHS Markit, said: “The September PMI data will add to worries that the UK economy is heading towards a bout of ‘stagflation’, with growth continuing to trend lower while prices surge ever higher.”

September’s reading was the fourth month in a row output has fallen and is the lowest figures for seven months. 

Stagflation occurs when prices in an economy are rising sharply, but growth is anaemic, causing living standards to fall.

A sharp slowdown in activity in the UK’s manufacturing industry, driven by severe shortages of raw materials and workers restricting production and demand softening, weighed on overall growth.

British businesses hiked prices at the fastest pace on record to offset rising costs for staff and components squeezing profits, according to IHS Markit.

“Shortages are meanwhile driving up prices at unprecedented rates as firms pass on higher supplier charges and increases in staff pay,” Williamson said.

“Brexit was often cited as having exacerbated global pandemic-related supply and labour market constraints, as well as often being blamed on lost export sales.”

Britain is experiencing an acute energy crisis, triggered by soaring natural gas prices making it financially impossible for energy providers to maintain normal production levels. Several large providers have gone bust as a result of the increase in gas prices.

The weak reading will be a cause for concern for officials at the Bank of England, who will deliver their latest interest rate decision at noon today. Rising prices, compounded by slowing growth, tends to make monetary policy less effective at stimulating the economy. 

Experts expect the Bank to keep rates unchanged at a record low 0.1 per cent and refrain from tweaking its quantitative easing programme.