Stagflation is here but no-one admits it

Central bankers' jobs just got harder - they are under pressure to cut interest rates but inflation is far from dead. Raising interest rates is the only weapon they have to fight inflation. But high interest rates stifle credit, hobble economic activity, put jobs at risk and make mortgages more expensive.

Jerome Powell, boss of the US central bank, the Federal Reserve, gets a regular verbal kicking from President Trump, who wants the Fed to cut the current 4.25-4.5% rate to 1%. The President points to America's near-full employment as one reason to cut rates.

But a more pressing reason is the huge amount servicing America's $37 trillion debts costs - about $2.6 billion a day, or almost $1 trillion a year. That's enough to pay about 40 million private soldiers for a year.

Powell is putting up strong resistance to the President. He doesn't want to cut rates all the time inflation is sticking around. Perhaps he's right. Core inflation in the US was 2.9%/year in June, slightly higher than the previous month. And the expectation is that inflation will creep higher as a consequence of the Presidential tariffs. Some projections put US core inflation by the end of 2025 at more than 3%. That's 1% higher than the Fed would like.

No better in Britain

In the UK core inflation - which excludes food and energy prices - in June was 3.7%, up 0.2% from May's figure. Services inflation was even higher, at 4.7%/year. Food inflation is now at its highest annual rate since February 2024. The unemployment rate is also up, now 4.6% between February and April, against 4.4% year-on-year. Job vacancies in the UK dropped to 736,000 in the three months to May, the lowest level since 2012.

Andrew Bailey, boss of the Bank of England (BoE), cautiously has fueled hopes of a rate cut (from its current 4.25%) when the bank next meets, on 7 August.

Bailey, like Powell faces long-term problems resulting from government policy. These range from infrastructure needs, fiscal deficits, an aging population leading to rising healthcare costs, and a shrinking working population having to support a growing retiree cohort. Never mind other issues, such as mitigating unwanted climate change or the challenges of AI. These just add to the foggy future.

Here today, gone tomorrow

Politicians have an even more difficult job than central bankers. They have to make policy for the short-term, hoping to please near-term voters, while pretending to plan for the long-term. This is one of the more obvious drawbacks of democracy. Winston Churchill said "democracy is the worst form of government except all those other forms that have been tried from time to time."

At some point the US will find it impossible to borrow more. But British people who see America's vast and apparently ever-ballooning national debt of America have no reason to feel smug; they have their own fiscal time-bomb to worry about. The Office of Budget Responsibility (OBR), the independent economic forecaster, has no reason to placate voters - it can take a long hard look at the future.

And its latest peer into the gloom makes for depressing reading. Among its analyses of current governments failures it projects that within 40 years age-related spending (the state pension, greater healthcare costs) will increase Britain's debt from the current 94% of gross domestic product (GDP) to an eye-watering 270% of GDP. In the 1950s the state pension accounted for 2% of GDP; within 50 years it will cost almost 8% of GDP. Some local councils now spend more than 80% of their revenue on social care. The welfare state, which seemed such a brilliant idea 70 years ago, is no longer affordable in its present form. But no-one will vote for any realistic reduction in its provisions.

The UK already has weak economic growth. The tariff trade-wars are likely to impede US growth. Germany is likely to have zero growth this year. Stagflation - a combination of economic stagnation and relatively high inflation - is already with us. Just don't expect any governing politician or central banker to admit it.

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