Tuesday, September 27

UK inflation will soar to ‘astronomical’ levels over next year, thinktank warns | inflation


Inflation will soar to “astronomical” levels over the next year forcing the Bank of England to raise interest rates higher and for longer than previously expected, according to a leading thinktank.

The National Institute of Economic and Social Research also forecast a long recession that would last into next year and hit millions of the most vulnerable households, especially in the worst-off parts of the country.

NIESR said gas price rises and the escalating cost of food would send inflation to 11% before the end of the year while the retail prices index (RPI), which is used to set rail fares and student loans repayments, is expected to hit 17.7% .

Stephen Millard, the institute’s deputy director, said the economy would contract for three consecutive quarters, shrinking the 1% by the spring of next year.

He added there will be “no respite” for British households and businesses from “astronomical inflation” in the short term and “we will need interest rates up at the 3% mark if we are to bring it down”.

As the government faces calls to step in with further support for hard-pressed families, NIESR said average incomes would fall by a record 2.5% this year, leaving millions of families to use savings or expensive credit to pay essential heating and food costs this winter .

In its half-yearly economic health check, the thinktank said the number of households with no savings was set to double to 5.3 million by 2024. Families in the north-east, which rely heavily on public sector jobs, were the most likely to see their savings disappear after using them to pay for day-to-day bills.

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The report painted a gloomier picture than most forecasts of the UK economy, which have tended to play down the likelihood of a long period of contraction.

Bank of England officials will give their verdict on the state of the economy on Thursday when the central bank’s monetary policy committee (MPC) will make its latest decision on interest rates and publish its quarterly review.

Most analysts have penciled in a majority of the MPC’s nine members voting for a 0.5 percentage point increase in the Bank’s base rate to 1.75%, pushing most mortgage rates to 3.5%.

Concern about the increase in the cost of living this year has become the top issue for households, according to recent polls by Ipsos Mori, and have dominated the debate between the two candidates vying for the leadership of the Conservative party.

In May, the Bank said inflation would rise slightly above 10% and fall quickly as interest rates of about 2% began to depress consumer demand.

NIESR said it expected the Bank to continue hiking rates until they reached 3% and keep them in place for longer than previously expected to bring inflation down to 3% by the end of next year.

While about 80% of mortgage borrowers are on fixed rate products, millions of them will need to remortgage at higher interest rates over the next year. Higher mortgage rates also feed into private rental costs, which have already risen sharply in recent years.

The thinktank said below inflation wage rises would become entrenched and by 2026 would mean that real incomes, after inflation is taken into account, would be 7% below the pre-Covid trend.

Jagjit Chadha, the director of NIESR, said the incoming prime minister should “focus economic policy on redistributing resources to the most financially vulnerable households and maintain public services”.

He said it made economic sense to protect vulnerable families, renewing the institute’s call for a rise in Universal Credit payments of £25 per week at a cost of £1.35bn from October 2022 to March 2023.

The government should also raise the energy grant from £400 to £600 for 11 million low-income households, at a total cost of £2.2bn, he said.

Chadha added that “to turn some of the leveling up rhetoric into reality, the government should consider doubling the financial support for the Towns Fund from £4.8bn to £9.6bn and expand the remit of the UK Infrastructure Bank; increasing its capital from £14bn to £50bn”.


www.theguardian.com

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