June 20, 2023 - 7:00am

Mortgage rates are rising ever higher. A two-year fixed rate mortgage has now risen above 6%, according to data from Moneyfacts. Rates are rising in anticipation of the Bank of England further tightening monetary policy this week. The Bank’s move is in response to inflation that is proving much more stubborn than many hoped.

This stubbornness can be seen across the board. In April, inflation in Britain was rising at an annual rate of 8.7%. Yet just across the sea in Ireland, inflation is rising at 7.2% – a full 1.5% less. Core inflation in Britain – that is, inflation with volatile components like food and energy removed – accelerated in April even as the headline number came down. All of this points to inflation sticking around.

The costs of this inflation are now becoming clear. For example, the Resolution Foundation has claimed that the average cost of a mortgage is about to go up ÂŁ2,900 for 800,000 people who will have to remortgage next year. These costs accrue on top of already high energy bills. Everywhere they turn, people are finding costs rising. For example, even if a budget-conscious household decides to cancel their holiday abroad and instead go on a getaway inside Britain, they will find prices have risen 20%.

The present moment is clearly highlighting the difficult trade-offs that central banks must navigate. Past a certain point, Britain is arguably better off experiencing a recession that will bring down inflation and interest rates than it is weathering the current cost increases that households are experiencing. Yes, in a recession some people will lose their jobs and some businesses will suffer, but perhaps this is better overall than the continuing budget squeeze being experienced.

A recession would almost certainly do the economy some good. Consider the employment and growth numbers. Economists would usually expect that if unemployment is very low then economic growth should be very high. The rationale is straightforward: if there are more people working, then the economy should grow faster. Today we see record low unemployment rates and almost no economic growth.

This suggests that the economy is sick — very sick. If everyone who wants a job has one, then why is the economy not growing? The purely economic answer is that productivity has fallen off a cliff. Lots of people may be employed, but the work they are doing seems sluggish, at least according to ONS data. In the first quarter of 2023, labour productivity fell 0.6% — the weakest annual growth, excluding during the pandemic, since 2013.

While not certain, it is possible that a recession might shake the economy out of this funk. Even if it doesn’t, however, the current economic situation increasingly feels like it is not sustainable. A recession may be unpleasant, and the human costs incurred from job loss should be taken very seriously, but the current inflationary stagnation is going nowhere fast. 

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics