Hopes for an economic recovery in 2025 have been dashed, as economists warn that the UK and US are sliding towards ‘stagflation’ – a punishing combination of weak economic growth, high inflation and rising unemployment.
Joseph Stiglitz, a Nobel prize-winning economist and professor at Columbia University told The Guardian that the risk of stagflation is a result of Donald Trump’s threat to implement tariffs on specific nations.
The term was coined by Iain Macleod, a Conservative politician, as he spoke in the House of Commons in 1965. “We now have the worst of both worlds,” he said. “Not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’.”
This economic condition affected many major economies in the 1970s, when the global oil crisis pushed up the costs of goods at the same time that inflation was rising. The UK could no longer import oil from the Middle East and was forced to ration electricity to preserve energy, which led to low growth and long stretches of high unemployment.
Is the UK economy heading for stagflation?
There are signs of a possible repeat. The Bank of England recently lowered its growth forecast to 0.75% – a sign of a slowing economy.
At the same time, new tax policies in the UK look likely to fuel a wave of job losses. A quarter of UK companies plan to reduce headcount in response to an impending increase in employers’ national insurance contributions, according to a survey of 2,000 businesses by the Chartered Institute of Personnel and Development (CIPD).
Inflation has fallen from highs seen in 2021-22, but the latest headline figure of 3% is still above the Bank of England’s 2% target. And President Trump’s tariffs could cause the rate to jump, according to Stiglitz.
“Almost all economists agree that the tariffs will increase prices,” he stated. “How much it will increase prices is a little bit affected by the magnitude of the appreciation of the exchange rate, but all economists think that the extent of the appreciation of the exchange rate won’t be anywhere near enough to compensate for the tariffs.”
Data released by the Office for National Statistics shows that the UK economy grew by 0.1% at the end of 2024. However, George Lagarias, chief economist at Forvis Mazars, a professional services firm, believes this does not change the UK’s broader economic outlook. “We wouldn’t pop the champagne just yet,” he wrote in an article on LinkedIn. “The spectre of stagflation is very much alive.”
Why is stagflation so dangerous?
Stagflation drives up costs for goods and services. People have less money to spend and demand for products falls. This forces companies to slow hiring and stop growing, bringing the economy to a screeching halt.
What makes stagflation particularly dangerous is that it is difficult to combat. This is because the policy solutions frequently used to counter slow economic growth tend to worsen inflation and vice versa. In a recession, for instance, central banks might slash interest rates to stimulate economic growth. While doing so may solve the growth problem, it could also push up the inflation rate. Stagflation, economists stress, is the worst of both worlds.
Hopes for an economic recovery in 2025 have been dashed, as economists warn that the UK and US are sliding towards ‘stagflation’ – a punishing combination of weak economic growth, high inflation and rising unemployment.
Joseph Stiglitz, a Nobel prize-winning economist and professor at Columbia University told The Guardian that the risk of stagflation is a result of Donald Trump's threat to implement tariffs on specific nations.
The term was coined by Iain Macleod, a Conservative politician, as he spoke in the House of Commons in 1965. “We now have the worst of both worlds,” he said. “Not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’.”
