Brits are set to shoulder the worst cost of living squeeze since the early 1990s, ignited by swelling energy bills and food prices compounding to spike household budgets.
This week’s higher than expected inflation reading bounced one the world’s top investment bank’s cost of living forecasts.
Wall Street titan Goldman Sachs lifted its expectations for inflation to peak at 7.2 per cent, up from 6.8 per cent.
The last time inflation in Britain was that high was in 1991.
Global supply chain breakdowns are expected to continue to ensnare the UK economy, putting further upward pressure on prices over the coming months.
In a sign Britain could be headed for an inflation feeding wage/price spiral, Goldman Sachs warned severe price pressures are now emanating from the services economy as a result of strong wage growth, posing a threat to significantly dialling up the cost of living.
“Stronger wage growth could pose upside risks to our forecast,” analysts at Goldman Sachs said.
The investment bank’s indicator of short-term inflation expectations has also climbed to its highest level since it started tracking the data 22 years ago.
A de-anchoring in households’ cost of living forecasts poses risk to inflation becoming baked into the UK economy in the long-term as it could prompt workers to demand higher pay, strengthening incentives for businesses to raise prices further to alleviate margin pressure.
Inflation will also be boosted by the energy watchdog hiking the cap on energy bills by as much as 50 per cent.
Brits’ budgets are already being stretched by prices for essentials climbing at historically high rates, with food and energy costs up 4.2 per cent and 24.5 per cent over the last year respectively.
Figures published by the Office for National Statistics this week painted a sobering picture of the outlook for UK households over the coming year.
Fresh jobs market data revealed real wages – which measures pay net of inflation – fell for the first time in around a year and a half, contracting 0.9 per cent over the last year.
Experts at Capital Economics, a consultancy, expect real pay to tumble 2.5 per cent.
Falling living standards in the UK has only occurred a handful of times since the financial crisis, underlining the severity of the current cost of living crisis.
Meanwhile, inflation accelerated to 5.4 per cent in December, the highest rate in recent history.
A ratcheting up in the cost of living has ignited a flurry of City economists bringing forward their bets on when the Bank of England will next hike interest rates, with most now penciling in another 15 basis point bump at the Bank’s next meeting on 3 February.
The Bank “has expressed concern at recent meetings that expectations might become de- anchored if it does nothing” to tamp down on rising prices for basic necessities by lifting rates, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.
This week, governor Andrew Bailey stressed the Bank will do everything in its power to get inflation under control.