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Britain is heading for \u201cstagflation\u201d, according to at least one gloomy forecast, as energy prices<\/a> bite and inflation<\/a> jumps as a result of the Iran war<\/a>. <\/p>\n Stagflation \u2013 a combination of rising inflation, higher unemployment<\/a> and low or zero economic growth \u2013 is seen as a \u201cworst of both worlds\u201d scenario because it is hard for policymakers to make clear choices.<\/p>\n If they boost employment, that only adds to inflation. If they fight inflation, that hurts growth. <\/p>\n Thomas Pugh, chief economist at RSM UK, said: \u201cPresident Trump\u2019s announcement of a naval blockade<\/a> of the Strait of Hormuz<\/a> has shifted the focus back to the risks of higher energy prices and recession. It’s now looking inevitable that the UK is in for another bout of stagflation, even if inflation won\u2019t go as high as in 2023.<\/p>\n \u201cFurther constraining supply leaving the region pushes energy prices to levels that would trigger demand destruction in Europe, the UK and Asia. That would tip the UK into recession and potentially force the Bank of England<\/a> to raise interest rates.”<\/p>\n Inflation hit 12.8 per cent in 2023. It is now at 3.3 per cent, according to official March figures.<\/p>\n Last time it met to discuss rates, the Bank of England held them at 3.75 per cent. Before the war, the strong expectation was that rates could come down two or three times this year, cutting borrowing costs for homeowners and businesses.<\/p>\n Economists still say the Bank can resume its original path as long as the Iran conflict doesn\u2019t drag out past the summer. Inflation, the Bank thought, was coming down prior to the first attack.<\/p>\n Not all City economists are so pessimistic. None think the economy is about to boom but they doubt a recession looms.<\/p>\n Paul Dales, chief UK economist at Capital Economics, said: \u201cWhile acknowledging the huge uncertainty, we think it is more likely that the UK economy will stagnate rather than contract significantly. And because the labour market is much weaker now than in 2021\/22, this bout of inflation will probably be milder and shorter, perhaps with inflation rising from 3.0 per cent in February to a peak of 4.0 per cent around the turn of the year. And with interest rates already reasonably high, I doubt the Bank of England will raise interest rates in response.\u201d<\/p>\n