A Two-Household Stock-Flow Consistent Model of the UK Economy: Distributional Consequences of Orthodox Disinflationary Policy and Alternatives

We present a two-household stock-flow consistent (SFC) model of the UK economy using data from the Office for National Statistics (ONS). The model explores the dynamics of the recent inflation episode, focusing on the interplay between inflation and income inequality through the theoretical lens of income conflict. It comprises seven sectors: households (disaggregated into rentiers and workers), non-financial corporations, monetary financial institutions, insurance corporations and pension funds, the government, and the rest of the world. The model is calibrated to 2016 ONS Blue Book data and validated dynamically against 2017–2024 national accounts. We impose three policy scenarios over 2025–2030 to evaluate their capacity to capture the distributive tensions underlying recent inflationary developments. Our results suggest that an orthodox monetary intervention by the Bank of England, administered solely through interest rate management, raises nominal GDP only marginally while paradoxically increasing cumulative inflation via the cost-push channel of higher borrowing costs, worsening the income distribution between workers and rentiers. A fiscal consolidation scenario produces a substantial output contraction without distributional improvement. In contrast, a progressive taxation scenario, administered by eliminating fiscal drag on workers and raising income tax on rentiers, generates significant distributional improvements at negligible macroeconomic cost.