Inflation will exceed the Bank of England’s (BoE) 2% target for over a year, impeding UK economic development and depleting the workers’ finances. According to consulting firm the EY Item Club, prices are predicted to decrease considerably more slowly than initially anticipated because of the continued high cost of food and energy.
Inflation in the UK climbing
Inflation in the UK is expected to average 7.6% this year, up from the group’s April prediction of 6.2%, further straining household budgets. On the other hand, annual salary growth isn’t expected to outpace price hikes until 2025.
According to the research, households would be put under even greater strain after the bank increases interest rates twice more to a maximum of 5.5 percent from their present level of 5%. The slow-burning effects of higher prices and interest rates on the UK economy will mostly be caused by people cutting down on spending and firms avoiding investments.
Although the nation is on course to avoid a recession, the EY Item Club has more than slashed its 2024 GDP growth estimates from its April forecast of 1.9% to 0.8%. The report also revised its medium-term GDP predictions because monetary policy lags and requires time to restrain growth. Notably, rate reductions aren’t scheduled to occur until the second half of 2024.
The two percent target won’t be reached until the end of 2024
Last week, figures from the Office for National Statistics revealed UK inflation has finally started to drop as predicted. The rate decreased quicker than anticipated in June, from 8.7% to 7.9%, mostly due to decreasing petrol prices.
According to experts, the UK’s economic prospects depend on declining living costs, which enable the Bank to contemplate lowering interest rates. A major risk to the prediction is the outlook for inflation and interest rates. According to Martin Beck, chief economist at the EY Item Club, the possibility of even more rate increases will be quite important should inflation turn out to be more persistent than anticipated.
The report anticipates that the Bank’s two percent target won’t be reached until the end of the next year. Governor Andrew Bailey has not been able to achieve this since July 2021. However, Rishi Sunak, the prime minister, has expressed that he will get the inflation down to 5% by the end of this year. Notably, the EY Item Club report believes that the inflation will average 3.4% next year, up from the 2.5% forecast three months ago.
Why are interest rates rising?
BoE interest rates are now 5%, up from 4.5% last month. In reaction to this and in preparation for another hike in August, several lenders have boosted their rates.
On the other hand, inflation, as measured by the Consumer Prices Index (CPI), decreased to 7.9% in the year ending in June. A peak of 11.1% in October 2022 represented a considerable decline from the 8.7% recorded the month before. While the decrease in inflation in June is reason for some hope, it should be seen in light of the government’s 2% inflation objective for the BoE.
The growing cost of energy has been one of the key causes of the sharp increase in inflation. But this is already diminishing. The energy price ceiling, as established by the regulator Ofgem, is £2,074 as of July 1. The previous cap amount was £3,280 and went into effect on April 1. The government’s Energy Price Guarantee, which estimated the average annual cost at £2,500, had temporarily replaced the cap. A new cap, which is anticipated to be lower once again, will go into effect on October 1, 2023.
