Inflation will soar past 10% this year to its highest level since 1982 the Bank of England warned today as it raised interest rates for the fourth time in a row.
In a grim set of forecasts, it predicted that growth will contract in the final three months of 2022, sending the economy into reverse as the cost of living squeeze sees households rein in their spending.
This would not be a recession, defined by two quarters in a row of falling gross domestic product (GDP), but the Bank forecasts very weak quarterly growth in 2023.
Governor Andrew Bailey anticipated energy bills rising another 40% in October, and disposable income dropping at its fastest rate since the financial crisis.
He slashed growth forecasts, predicting the economy would flatline for the next two years throwing thousands out of work.
But he admitted that raising the bank rate by a quarter to 1% would have little impact in the face of a ‘very sharp slowdown’ he blamed on coronavirus and the war in Ukraine.
‘The biggest driver down of inflation is the shock to real income,’ he told reporters.
‘Disposable household income is expected to fall by 1.75% in 2022 which, apart from 2011, will be the largest comparable contraction since comparable records began in 1964.
‘I recognise the hardship this will cause for households in the UK, particularly those on the lowest income with little or no savings who are hit hardest by increases in the price of basic necessities such as food and energy.’
Charities said the forecasts would be met with ‘shock and fear’ by millions on low incomes with the Resolution Foundation estimating a £1,200 hit per household this year.
‘The Government can’t shield us all from the pain of rising energy costs, but can and must provide more targeted support for the low-and-middle income households worst affected by this cost of living crisis,’ said research director James Smith.
The Bank said inflation would likely peak at 10.25% at the end of this year before falling rapidly to 2% in 2024.
But it has repeatedly increased its predicted inflation rates in recent months and admitted there was ‘considerable uncertainty’ about its latest forecast, with three of its nine decision makers calling for a bigger rate rise.
‘We are walking this very narrow path now,’ Mr Bailey said.
‘That’s why we’ve been quite careful about calibrating the correct response.’
Unemployment is at a near-50-year low of 3.8%, with competition for workers adding to the pressure on inflation.
But Mr Bailey said it was expected to grow to 5.5% in the next three years as spending drops.
The bounce-back from Covid has run its course with no growth now expected between the start of 2023 and the end of 2024.
The rate rise is good news for savers after household saving increased during the pandemic.
But it came as credit card borrowing jumped 10.6% in the year to March, its fastest increase since 2006.
Prime Minister Boris Johnson admitted the economy faced a ‘tough patch’ before casting his vote in today’s local elections.
And Labour repeated its demand for a windfall tax on North Sea oil producers on the day that Shell reported a tripling of profits top £7.3bn for the first three months of the year.
‘Not only are ministers shrugging their shoulders at the spiralling cost of living crisis, they’ve made it worse by hitting working people and businesses with fifteen Tory tax rises that will further stifle our economic growth,’ said shadow chancellor Rachel Reeves.
‘With a one-off windfall tax on oil and gas producer profits we can cut household bills by up to £600 and support businesses through the cost of living storm.’
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