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Stagflation nation

As the UK’s recent problem of higher inflation and slower economic growth than elsewhere is largely due to the lingering effects of the pandemic and Brexit, we think the UK will probably look like the stagflation nation for another couple of years yet. Admittedly, we do think that CPI inflation will fall from 8.7% in April to the 2.0% target by the first half of 2024 and that core CPI inflation will decline from 6.8% to 2.0% by early 2025. But those falls will be slower than in the US and the euro-zone. And we suspect inflation will drop all the way to 2.0% only if the Bank of England triggers a recession by raising interest rates from 4.50% now to a peak of 5.25% and keeps interest rates there until the second half of 2024.

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