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Prepare for 15% inflation next year, Britain warned

by August 4, 2022
August 4, 2022
Prepare for 15% inflation next year, Britain warned

Inflation could reach 15 per cent early next year, a leading think tank warned yesterday, as soaring gas prices exacerbate the UK’s cost of living crisis.

The Resolution Foundation said the Bank of England’s inflation forecasts were likely to be revised upwards in the light of new projections on the price of wholesale gas. Previously, the central bank has said it sees inflation topping 11 per cent in October. City analysts expect it to go even higher, at 12 per cent.

As a consequence, the think tank said, it expected the Bank to announce the largest interest rate rise in 27 years. Economists also expect an increase of between 0.25 and 0.75 per cent.

Andrew Bailey, the Bank of England governor, has made it clear that while a 0.5 percentage point increase in interest rates is “not locked in”, it will be “among the choices on the table” when the monetary policy committee makes its decision today.

Since December, the bank has raised interest rates in 0.25-percentage-point increments, but pledged in June to act “forcefully” if needed in response to inflationary pressures. If the bank’s committee does raise its central benchmark rate to 1.75 per cent, it will be the sharpest increase in borrowing costs for more than a quarter of a century.

Analysts have suggested that the final decision will be finely balanced as inflationary pressures are weighed against the rising risks of recession.

Rishi Sunak intends to use the bank’s announcement to push his argument that inflation must be brought under control before it is safe to cut taxes.

“If we rush through premature tax cuts before we have gripped inflation, all we are doing is giving with one hand and then taking away with the other,” he said. “That would stoke inflation and drive up interest rates, adding to people’s mortgage payments. And it would mean every pound people get back in their pockets is nothing more than a down payment on rising prices.”

In its report, the Resolution Foundation said current expected gas prices for this winter are close to 50 per cent higher than they were in the aftermath of the Russian invasion of Ukraine. The energy price cap is now expected to rise to £3,358 in October and then go up again to £3,615 in January 2023. High gas prices also push up electricity prices, with both leading to increased costs for businesses and consumers that feed inflation.

Jack Leslie, a senior economist at the foundation, said while some other commodity prices had fallen in the past month, the cost of gas was weighing on inflation projections.

“The outlook for inflation is highly uncertain, largely driven by unpredictable gas prices, but changes over recent months suggest that the Bank of England is likely to forecast a higher and later peak for inflation — potentially up to 15 per cent in early 2023,” he said.

“While market prices for some core goods — including oil, corn and wheat — have fallen since their peak earlier this year, these prices haven’t yet fed through into consumer costs and remain considerably higher than they were in January.

“With gas prices continuing to reach record levels, both households and businesses will see large increases in their energy bills throughout the winter and into 2023. How long this high inflation will last is hugely uncertain, but the cost of living crisis looks set to last longer and hit households harder than previously anticipated.”

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Prepare for 15% inflation next year, Britain warned

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