The Bank of England faces the grim prospect of overseeing the largest inflation surge in recent memory, with prices rising more than seven times faster than its target, a top think tank warned today.
A sustained surge in energy costs triggered by Russia’s invasion of Ukraine and a sudden burst in demand after the Covid-19 unlocking will lift inflation in the UK to more than 15 per cent early next year.
That’s according to the Resolution Foundation, who said governor Andrew Bailey and the rest of the monetary policy committee (MPC) face “a protracted period of challenging policy making”.
The Bank of England has a mandate to keep inflation at two per cent. It has not been at that level since July 2021.
The grim outlook will pile pressure on the Bank to hike interest rates 50 basis points tomorrow, which would be the steepest increase in its 25 years of independence.
Analysts have criticised the MPC for sitting idly by in the second half of last year while inflation started to motor ahead.
The Bank left rates at a record low 0.1 per cent until December 2021 after it slashed them at the beginning of the pandemic. It has since raised them five times in a row to a 13-year high of 1.25 per cent. They are still low compared to historic levels.
Living costs are already up 9.4 per cent, the quickest acceleration since 1982.
The Resolution Foundation’s forecasts project inflation will keep surging until around the final months of next year, meaning households are set for the tightest grip on their living standards on record.
That squeeze has prompted economists to warn consumers will slash spending as their budgets are eaten up by soaring energy and food bills, likely tipping the UK into recession.
The National Institute of Economic and Social Research said today the country is already in the first stages of a protracted downturn.
Jack Leslie, senior economist at the Resolution Foundation, said: “It is clear that current expectations for gas prices this winter are more than twice what they were prior to the Russian invasion of Ukraine and higher than the peak in March 2022.”
“After the Bank of England’s decision [tomorrow], attention will rightly turn back to the Government – where the new Prime Minister, whoever it is, will have to set out new ways to support families in the autumn,” Leslie added.
A spokesperson for Rishi Sunak told City A.M. he had been clear throughout his leadership campaign that inflation was “the biggest danger we face”.
“He will scrap VAT on domestic energy bills giving families £160 to help cover costs this winter. That’s in addition to the £37bn package of support he announced as Chancellor, ensuring that almost eight million of the most vulnerable households across the UK will receive support of at least £1,200 this year,” the spokesperson said.
“He has shown he will take action to protect households in difficult economic times.”