If the UK’s latest GDP figures haven’t convinced you that stagflation exists, little will.
According to the Office For National Statistics, the UK had another no-growth month in January.
Meanwhile, Consumer Prices Index (CPI) inflation is still running at 3%, 1% above the Bank of England’s target.
A caveat: growth data is retrospective, so these figures don’t show how well or badly the UK economy is performing right now. It would take two quarters of negative GDP data to confirm the UK is enduring a technical recession. Inflation data has a one-month lag.
There’s no denying the picture is bleak though. Several organizations have already downgraded their predictions for UK economic growth (including the BoE). It barely takes a finger in the wind to note the UK’s small business community feels pessimistic. Growth is stalling again. Prices are rising and so are taxes. There’s a word for that: stagflation.
How Did Stagflation Set in?
Politicians avoid mention of stagflation for fear of spooking savers and markets. Commentators have been talking about it for a while. There’s lots of finger-pointing.
It’s cool to blame the government, which raised taxes at the last Budget. Taxes are blamed for stifling growth when businesses sorely need incentives. The government is now balancing that out by cutting benefits, scaling back financial regulation, and abolishing NHS England. That latter point about the NHS will be relevant later.
The pandemic is also still having its effect.
Many blame it for stalling capital investment, for hindering the educational prospects of millions of children, for placing significant numbers on long-term sick leave, and for forcing governments to spend huge sums to prop up the economy. That latter expenditure was undoubtedly inflationary, which has placed a strain on everyone’s wallets. Then Russia came crashing through Ukraine’s border in 2022.
Energy became more expensive in the wake of the second invasion of Ukraine. But the trend of global factors continues. Today, there’s no better example than Donald Trump’s tariffs and dealmaking in Ukraine itself. Both spooked markets.
Here’s what I find strange though.
I did a simple survey of the top 10 Google search results for “UK stagflation”. Since the start of this year, everyone from the BBC to an online publication for human resources professionals has written about it.
What I found was a range of helpful articles. Not one of the top-ranking pieces I found specifically addresses UK rent and house prices in any depth. Even the Institute of Chartered Accountants for England & Wales, a professional body, neglects it. Why?
UK Housing is Expensive and Insecure
According to the National Housing Federation, 8.4 million people are living in unaffordable, insecure, or overcrowded housing in the UK. And little wonder. The average house price in England has risen by 56% over the past decade. Wages have risen only 20%. Living in a nice place is very expensive.
As the Bank of England itself says, buying a house is typically one of the biggest, if not the biggest, transactions people will complete in their lifetimes. But owning is becoming more challenging, and renting is not necessarily a salve.
Private renting is onerously expensive. Excluding London, the average UK monthly rent payment is £1,100. In many cases that’s more than a mortgage.
Why does this matter to stagflation? Because lower economic growth means companies don’t create jobs. Fewer jobs mean workers have less bargaining power over wages, because they are not the ones in demand. This makes it even harder to keep up with rising costs, including housing. Wage growth is visible, but for a while it wasn’t keeping pace with inflation.
For the period November 2024 to January 2025, year-on-year wage growth was thankfully 5.9% – above inflation of around 2.5%. But prices are still rising. The headline rate of CPI inflation is 3.%. CPIH, a measure of inflation that includes housing, was much higher at 3.9% in January this year.
If you look at this picture, it’s difficult to avoid mention of Maslow’s hierarchy of needs. This popular psychological framework suggests food, shelter, and warmth are the three fundamental requirements for human wellbeing. In practical terms, that’s housing. You can’t grow an economy if people feel stuck in unaffordable and unsuitable housing.
UK Stagflation: Back to the 1970s
We’ve been here before. In the UK in the 1970s, the economic expansion of the post-war period gave way to falling growth, repeated industrial crises, widespread strike action, and a stagflation crisis as productivity plummeted and prices rose.
By 1977 interest rates were at 5.5%. By the end of 1978 they were at 12.5%. By 1979, when Margaret Thatcher rose to power, they had hit a staggering 17%.
One effect of this was lower house prices, as the cost of servicing mortgage debt rose and demand for house purchases cooled signficantly. Could the same thing happen now and make life easier for those trying to move up in the world? The market today is different.
By the end of the 1970s, the average UK house price was around £17,000. Today it’s more than £268,000. In 1979, the UK’s population was 56.2 million. Today it’s over 69 million. And politicians of all stripes are now openly admitting we don’t build enough houses. That means there isn’t enough housing to cater to demand. This will only send prices one way in the longer term: upwards.
Why Isn’t Housing Talked About More?
The fact that this gets little-to-no mention in my Google search is strange. But I have a potential explanation.
Is it too much of a leap to imagine that most people researching and writing about stagflation will be homeowners – or those at least amassing the significant sums needed to progress onto the housing ladder?
Could it also be the case those people we entrust to solve this issue are also at least partially financially disincentivised from blaming housing costs?
By August last year, the Labour Party, now in government, had more landlord MPs in its ranks than the Conservative Party. MPs are required to transparently declare any conflicts of interest on a register. They don’t talk about this one much in parliament.
One thing is certain: stagflation is here and it’s real. Perhaps it’s time for a more honest conversation though.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
