Inflation in the UK has peaked and is on course to fall rapidly over the coming year, easing the worst cost of living crisis in a generation, but a slow burning, mild recession is still a threat, the Bank of England said today.
The rate of price increases is poised to more than halve from a 41-year high of just over 11 per cent by the end of the year.
The Bank reckons inflation will scale down to just over four per cent by Christmas and eventually drop below its two per cent target in the middle of 2024.
Rapidly falling international energy prices, after they surged to record highs following Russia’s invasion of Ukraine, has thrown inflation on a downward path.
A sudden surge in spending after Covid-19 restrictions were lifted has started to unravel, putting downward pressure on inflation.
“Wholesale gas prices have fallen recently and global supply chain disruption appears to have eased amid a slowing in global demand,” the Bank said in a new set of forecasts for the UK economy.
Despite projecting a quick inflation deceleration, governor Andrew Bailey and the rest of the monetary policy committee (MPC) backed a second successive 50 basis point increase to interest rates, sending them to a near 15 year high of four per cent.
The move was in line with market expectations.
Elevated inflation has already wrecked household and business finances, likely triggering a sharp spending slowdown in the year ahead and forcing the UK economy into a recession lasting 15 months, the Bank said.
Britain will lose around one per cent of GDP and its economy could still be running below pre-Covid levels by 2026, the Bank warned. However, it now sees much shallower and shorter recession than projected in November.
Post tax income is poised to tumble 2.5 per cent this year and 1.5 per cent next year, which would be one of the sharpest erosions of spending power ever. Households are likely to cut back in response to that hit, prompting the Bank’s recession warning.
The coming contraction is projected to force hundreds of thousands of Brits out of work. The Bank reckons the unemployment rate will top four per cent this year and peak at 5.3 per cent in three years.
While the spending slowdown has been mainly manufactured by inflation eating into Brits’ incomes, the Bank’s ten successive interest rate increases have tightened the screw on budgets, adding to the economic slowdown.
The MPC said today “further tightening in monetary policy” will be needed if “more persistent” inflationary pressures stick around.
Markets are betting the Bank will have to cut rates at the end of the year to jolt the economy out of recession.