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Global economy hit by stagflation fears: Households face soaring costs


Global economy gripped by fresh stagflation fears: Households face soaring living costs as recovery stalls


The spectre of stagflation is stalking the global economy as growth slows and the cost of living soars.

Prices of commodities from nickel to wheat are all on the rise due to sanctions slapped on Russia by the West in an attempt to end Vladimir Putin’s bloody rampage in Ukraine.

Stagflation – where an economy stagnates, but inflation is rife – is considered a disaster for governments and households.

Prices of commodities from nickel to wheat are all on the rise due to sanctions slapped on Russia by the West in an attempt to end Vladimir Putin’s bloody rampage in Ukraine

It usually means that while prices rise, wages remain flat, forcing families to cut their spending and even pushing low-income households into poverty.

Businesses, meanwhile, see their costs climb, but the lower level of activity in the economy means there is little they can do to meet these expenses. Now economists are becoming increasingly worried that stagflation could become a reality.

Britain’s FTSE 100 index has fallen 7.2 per cent so far this year.

America’s S&P 500 is down by 13 per cent since the turn of the year, as the tech giants which make up so much of the US stock market have taken a beating.

And the Shanghai Composite index, which contains China’s biggest companies, has slumped 9.3 per cent since the turn of 2022.

‘Stagflation is the fear stalking the markets right now and the longer the war rages, the more likely this scenario becomes,’ said AJ Bell’s investment director Russ Mould.

According to the Centre for Business and Economic Research (CEBR), the harm could be drastic. 

It has cut its growth forecasts for the UK for this year from 4.2 per cent to 1.9 per cent, costing the economy £51.4billion. Next year, another £42.5billion will be shaved off as output flatlines.

The CEBR is also warning that the economy will tumble into recession with three consecutive quarters of contraction expected in 2023. 

Inflation could hit a 40-year high of 8.7 per cent, the CEBR warned, and instead of falling back towards the Bank of England’s 2 per cent target later this year it is likely to stay around 7 per cent until early 2023. 

The effect on households would be devastating. Many are already feeling the pain, as inflation hit a 30-year high of 5.5 per cent in January, with those on low incomes edging even closer towards the breadline.

Others forecasts are less pessimistic. Thomas Pugh, an economist at accountancy firm RSM, thinks the UK will still grow by 3.5 per cent this year.

But industrial users of gas and electricity – such as steel manufacturers and factories – may opt to temporarily shut down rather than pay the sky-high prices for their energy, he said. 

This could threaten thousands of jobs and lead to more shortages of items from metals to computer chips.

Neil Shearing, chief economist at Capital Economics, said 2022 could be a painful year for Britons even if growth doesn’t technically grind to a standstill.

‘But growth is going to be lower. There will be a squeeze on real incomes and inflation will be higher, so it will feel like stagflation. People won’t feel like things are good.’

The events in Ukraine will have caused a headache for policymakers at the Bank of England, who are due to make their latest decision on interest rates next week. Soaring inflation increases the need that they will have to hike rates, in an effort to encourage households and businesses to save rather than spend and bring down prices.

But this could threaten the economic recovery even more, causing firms to hold back on investment and households to hoard their money.

Whatever the decision on Threadneedle Street, Britons face a turbulent few months.

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