Stagnation: What is it, and what can be done to combat it?

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A recent report has warned that the UK is heading for recession, which will plunge millions of vulnerable households across the UK into financial crisis.

It is published by the National Institute of Economic and Social Research (NIESR), the UK’s oldest independent research institution.

It warned that more than 2.5 million households could see their savings eroded by the rising cost of living, predicting that by 2024, one in five UK households would have no savings.

The report also claims that the threat of stagnation has returned for the first time since the 1970s.

But what is the status quo – and how long will it last?

What is stagflation?

With Britain in the grip of slow economic growth and rising prices, fears of stagnation are growing.

The stagnant rate is a combination of stagnation – weak or non-existent economic growth – and inflation – rising prices – and it usually leads to fewer jobs and lower wages.

Professor Stephen Millard, NIESR’s deputy director of macroeconomics, said: “The UK economy is heading towards a period of stagnation with rapid inflation and a simultaneous recession hitting the economy.”

The Bank of England expects inflation to rise to 13.3 percent before the end of the year, up from a 40-year high of 9.4 percent in June.

The NIESR report warned that this rise in inflation, driven by unprecedented increases in energy bills, would push the economy into a relatively shallow, three-quarters technical recession, but added that the chances of a deep recession were increasing. are

Research shows that between the effects of inflation and the government’s refusal to increase benefits in line with inflation, the poorest 10% of households will be about 5% worse off.

This is despite the support they have been promised on energy bills, making them the worst affected of any income group in society.

The report also predicts that real incomes will continue to decline, falling only 2.5 percent in 2022, and by 2026 they are expected to be 7 percent below where they were going before Covid.

About 3% to 5% of that hit will come from Brexit, 1% to 3% from rising energy prices and the rest from government policy.

What can be done about stagflation?

This is a difficult problem for governments and economists to address because solutions to slow growth, such as cutting taxes and interest rates, worsen inflation, as these measures increase demand, which in turn raises prices. .

As John Stepak explains: “Stagflation is bad news for central banks, because the usual solution to a weakening economy is to cut interest rates in the hope of stimulating more activity, but high inflation The usual response is to raise interest rates. Curb activity.”

NIESR is calling on the government to increase Universal Credit payments to £25 a week for at least six months from October, to help the most vulnerable, at a cost of around £1.4 billion. will

It also called for Energy Bill Support payments to rise from £400 to £600 for 11 million low-income households, costing £2.2 billion.

Professor Adrian Pabst, deputy director of public policy at NIESR, said: “The incoming administration needs to provide immediate emergency relief to the 1.2 million most affected households and the one in five households that will be affected by the end of the energy price cap. will be financially vulnerable. Recession begins to bite.”

How can people prepare for the status quo?

Kalpana Fitzpatrick, editor of The Money Edit and author of Invest Now, says: “Persistently high inflation is not good news for cash savings, because if your cash can’t keep up with the rise in value, it’s worth faster. can be less than

“But it’s still important to stash cash savings, especially during stressful times. Everyone should keep at least six months’ worth of income as emergency cash savings. This is money you can use to pay for unexpected expenses. I can use it to help – anything from losing your job to a broken boiler.”

Kalpana also advises people to build an emergency fund for emergencies, and keep the money in an easy-to-access savings account.

He added: “If you have investments, stagflation can mean pressure on profit margins and you could see the value of your investment diminish.

“While this can be a cause for concern, the important thing is not to panic or pull your money out. Stock market fluctuations are normal in investing, and the best way to smooth out returns is to invest every month. Keep trickling small amounts into your investments and ride out the storm.