Harrowing graph shows worse yet to come as inflation spike just around corner

Andrew Bailey: There is ‘high level of uncertainty in economy’

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The Bank of England (BoE) sent a stark warning on Thursday that the UK risks a double-whammy of both a recession and inflation rising above ten percent. It raised interest rates to their highest since 2009, hiking them by a quarter of a percentage point to one percent. This was at the same time as the pound fell by more than a cent against the US dollar to its lowest level since mid-2020, below $1.24.

The BoE’s gloomy forecast caught investors by surprise as it aggressively cut bets on the central bank hiking rates.

Central banks are now scrambling to cope with a surge in inflation that they described as only transitory when it began with the post-pandemic reopening of the economy, before Russia’s invasion of Ukraine sent energy prices spiralling.

The BoE said it was also worried about the impact of renewed COVID-19 lockdowns in China which threaten to hit supply chains and exacerbate existing inflation pressures.

Data taken from the BoE shows a huge inflation spike just around the corner, before it drops off and balances out from around midway through next year.

Analysis says Consumer Price Index (CPI) inflation is expected to rise slightly above ten percent on average in the fourth quarter of 2022.

It states: “The significant majority of that expected increase reflects the rise of 54 percent in household energy prices in April and the projected increase of around 40 percent when the Ofgem price is next reset in October; and, to a lesser extent, higher food and goods prices, given the sharp rises in global agricultural commodity and energy prices and renewed supply chain disruption following the invasion of Ukraine.”

Goods and energy prices are projected to account for fourth fifths of the overshoot in CP inflation — relative to target — at the peak when “the contribution of energy prices to CPI inflation is expected to rise to 4 percentage points”.

The price cap mechanism means that it will take some time for changes in wholesale gas and electricity prices to be reflected in UK retail utility prices.

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The BoE report adds: “Given the operation of the price cap, consumer price inflation is likely to peak later in the UK than in many other countries, and may therefore fall back later.”

BoE Governor Andrew Bailey told reporters on Thursday: “It is a very weak projection, a very sharp slowdown.

“There’s a technical definition of a recession it doesn’t meet ‒ but put that to one side ‒ it is a very sharp slowdown in activity.”

He said the thing that would be “much worse is if inflation kept going up”.

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The UK, he added, is heading for a period of “very low growth”.

However, he denied that the BoE is making the cost of living crisis worse by raising interest rates.

Overall, the Bank expects the UK economy to hit a pothole in late 2022, contracting by almost one percent between October and December.

Gross Domestic Product (GDP) is forecast to remain below 2022 levels throughout the whole of next year with growth averaging zero over those 12 months.

While the Bank is not predicting two consecutive quarters of negative growth and so says the UK will avoid a technical recession, ITV’s business and economics editor Joel Hills describes this as “semantics”.

In an analysis piece he says that “2023 will look and feel like a recession nonetheless.”

When a recovery does happen, the BoE believes it will be weak because pressure on households is expected to persist.

Annual economic growth in 2024 is forecast at just 0.5 percent.

The period of weak growth coincides with rising interest rates.

The interest rate rise was the BoE’s fourth such move since December — the fastest pace of policy tightening in 25 years.

It said most policymakers believed “some degree of further tightening in monetary policy may still be appropriate in the coming months”.

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