The UK economy is in the curious, and not altogether pleasant situation, that while GDP shrank by 0.3 per cent in April, the inflation data for the same month showed a sharp increase, to 3.5 per cent, from the previous 2.6 per cent.
Typically an economy in negative growth is in what economists call an output gap, that is, producing less than the capacity of the economy.
With demand for goods and services falling faster than the supply of goods and services, this would typically lead to falling prices in the short-term, so inflation would come down.
But is this what is next for the UK economy, or will a pattern of higher inflation and low growth continue, a scenario known in economics as stagflation?
Gabriella Dickens, G7 Economist at Axa Investment Managers, cautions that the April inflation data is something of a special case.
She says: “In April, lots of things change price because it is the start of a new financial year, so the data is always volatile, and the April figure has already been revised downwards because the ONS overestimated how many cars would have to pay a new levy, and have since corrected the mistake and reduced the inflation number by 10 basis points.
“Another factor that made this April’s number something to be wary of is the fact the day they collect the data fell during Easter week, and during that week holiday and airline prices tend to be higher than during the weeks before and after. Last year, the day they collected the data wasn’t during Easter week.”
The ONS methodology is to pick a Tuesday each month and check the prices. This year, As Dickens says, the Tuesday in April they selected coincided with Easter.
Dickens expects inflation to remain above 3 per cent this year, but to fall away next year and back towards target.
Paul O’Neill, chief investment officer at Bentley Reid, says: “UK households continue to face pressure from elevated mortgage costs and higher bills in general — energy, water, road tax, air fares, you name it.
“That’s to say nothing of the frozen tax thresholds and increase in national insurance costs which are often passed on to employee compensation one way or another.
“Inflation is obviously much better than the 11 per cent we saw a few years ago but at 3.5 per cent it is the highest price growth among big western economies and remains well above the Bank of England’s 2 per cent target.”