The Bank of England has changed its forecast for inflation and has now predicted the consumer prices index to climb over 13% before the end of the year, and for it to remain ‘very elevated’ throughout much of 2023.
As the Monetary Policy Committee (MPC) announced the largest interest rate hike in 27 years – from 1.25% to 1.75% – it also revised its projections for inflation and economic growth.
It said that inflationary pressures have intensified significantly since its last report in May, largely reflecting a near doubling in wholesale gas prices.
“As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase CPI inflation in the near term.
“CPI inflation is expected to rise more than forecast in the May report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.”
Governor of the Bank of England, Andrew Bailey, said the risks around the Bank’s forecasts were “exceptionally large at present”. Independent forecasts made yesterday by two think tanks, the Resolution Foundation and the National Institute for Economic and Social Research (NIESR), put CPI inflation at 15% and 11% respectively for the autumn.
Inflation and pay
The NIESR forecast the retail price index, the measure often used by trade unions in pay bargaining, at a whopping 17.7%, putting further pressure on employers to match pay increases with the cost of living.
NIESR deputy director Stephen Millard said that interest rates would have to rise “the 3% mark” to bring inflation down.
The MPC also projected that the UK would enter recession from the fourth quarter of this year and will continue into next year. “Real household post-tax income is projected to fall sharply in 2022 and 2023,” it said.
TUC head of economics Kate Bell said: “Working people need an approach to inflation that protects jobs and that helps pay keep up with prices.
“But a rate rise does nothing about the current causes of inflation – global energy, commodity and food prices. It will only add to our problems, making a recession very likely and putting lots of people’s jobs at risk.”
She added: “The government must do more to get pay rising, starting with decent pay rises for public servants, a higher minimum wage, and stronger rights for working people and their unions to bargain for fair pay.”
Ben Kiziltug, head of northern Europe at HR software provider Personio, said: “With the UK’s interest rate spiralling, rising costs are adding to pressures already felt by consumers and businesses alike. But while rocky waters could lie ahead, businesses must ensure their people strategy isn’t first in the firing line.
“The last few years have demonstrated the vital role employers play as a social safety net for their people, supporting employees’ physical, mental and financial well-being. In order to fulfil this role while weathering the storm, it’s crucial that businesses are not prompted to make short term cuts. Instead, employers must continue to invest in their people to keep employees motivated and engaged – helping them to retain talent and succeed beyond this crisis.”
Other forecasts from the MPC included a prediction that the unemployment rate would go above 4% in the middle of 2023, rising to 6.25% by 2025.