ITV News Economics Editor Joel Hills reports on how rising inflation, which is hoped to ease the cost of living crisis, could just as easily add to it.
Inflation is high and rising. The worst is yet to come.The Bank of England believes that a painful squeeze on our living standards, driven, primarily, by soaring energy prices, is set to intensify and will push the UK economy into recession later this year.The annual headline rate of inflation is currently 7%. The Bank calculates it is heading for double-digits, peaking above 10% in the autumn. A record high.The UK economy is being hit by a series of shocks. The upheaval caused by a succession of lockdowns to contain Covid-19 has been followed by Russia’s invasion of Ukraine, which has further inflamed the international market price of gas, oil and a series of other commodities.
"This inflation is particularly concentrated in what you might called staple goods" - Bank of England governor Andrew Bailey on how the rising cost of living is hitting the poor the hardest
Household energy bills rose sharply in April, the Bank believes they will rise again in October by as much as 40%, taking the average domestic bill to above £2,800 a year.Eye-popping rises in food and energy costs dominate the headlines but, in truth, the increase in prices is broad-based.Rampant inflation will leave households and businesses feeling poorer for some time to come, and the Bank says it is powerless to prevent this. Spending will fall as a result.
"The thing that would be much worse is if inflation kept going up" - Andrew Bailey says the UK is heading for a period of "very low growth" but denies the Bank is making the cost of living squeeze worse by raising interest rates
The Bank expects the UK economy to hit a pothole later this year, contracting by almost 1% between October and December.GDP is forecast to remain below 2022 levels throughout the whole of next year with growth averaging zero over those twelve months.
The Bank is not predicting two consecutive quarters of negative growth, so a technical recession is avoided but this is semantics - 2023 will look and feel like a recession nonetheless.A downturn is coming and, disturbingly, the Bank believes that the recovery, when it comes, will be weak because pressure on household budgets is expected to persist. Annual economic growth in 2024 is forecast to be a feeble 0.5%.
A period of weak growth looks set to be accompanied by rising interest rates. The Monetary Policy Committee (MPC) hiked Bank Rate to 1%, a fourth consecutive increase.The market expects Bank Rate to reach 2.5% by the middle of next year. That’s looking punchy and, for some, will make the squeeze on their living standards worse.
Where interest rates go from here is incredibly uncertain. The official guidance is “most members” of the MPC “judge some degree of further tightening in monetary policy might still be appropriate in the coming months”.
Can we still be optimistic about the economy's near future? Joel Hills looks at the facts
We’ll see. The awful reality is that the squeeze on household spending may prove so intense that it does the Bank’s job for it.The Bank is increasing the cost of borrowing in an attempt to tame inflation in the medium term.Higher interest rates will not bring down energy bills or make it easier for companies to recruit, these hits to our living standards are unavoidable.Higher interest rates are designed to cool down the demand for labour and therefore upward pressure on pay.The labour market is running hot, pay growth is strong. While that may sound like a good thing, the Bank is concerned that higher pay rises may simply trigger another wave of price rises.
"It is hard to single out the effects of Brexit and the effects of Covid," Andrew Bailey tells Joel Hills
The outlook is extremely grim - but it could be worse.Real post-tax household disposable income will fall by 1.75% this year. The Bank estimates the fall be would be closer to 2.25% were it not for the support the government has announced so far to protect consumers.But this will be little consolation for the government. If the Bank of England is right, the next general election will be fought against an ugly economic backdrop.