Inflation will reach ‘astronomical’ levels over the next year, think tank warns | Inflation
Inflation will reach “astronomical” levels over the next year, forcing the Bank of England to raise interest rates higher and for longer than expected, according to a leading think tank.
The National Institute of Economic and Social Research also forecasts a long recession that will last until next year and will affect millions of the most vulnerable households, especially in the most disadvantaged regions of the country.
The NIESR said rising gasoline prices and escalating food costs will push inflation to 11% before the end of the year, while the retail price index (RPI), which is used to set rail fares and student loan repayments, is expected to hit 17.7%.
Stephen Millard, deputy director of the institute, said the economy would contract for three straight quarters, shrinking 1% by spring next year.
He added that there will be “no respite” for British households and businesses from “astronomical inflation” in the short term and “we will need interest rates of up to 3% if we want to bring it down.”
As the government is called upon to step in to provide more support to struggling families, the NIESR said average incomes will fall by a record 2.5% this year, leaving millions of families to use their savings or expensive credit to pay for essential heating and food costs this winter. .
In its biannual economic health check, the think tank said the number of households without savings is expected to double to 5.3 million by 2024. Families in the North East, who rely heavily on public sector jobs, were most likely to see their savings disappear after using them to pay everyday bills.
The report painted a grimmer picture than most forecasts for the UK economy, which have tended to downplay the likelihood of a long period of contraction.
Bank of England officials will deliver their verdict on the state of the economy on Thursday when the central bank’s Monetary Policy Committee (MPC) delivers its latest interest rate decision and releases its quarterly review.
Most analysts penciled in a majority of the nine MPC members voting for a 0.5 percentage point hike in the Bank’s base rate to 1.75%, pushing most mortgage rates to 3.5% .
Concern over the rising cost of living this year has become the number one concern of households, according to recent Ipsos Mori polls, and has dominated the debate between the two candidates vying for the leadership of the Conservative Party.
In May, the Bank said inflation would rise to slightly above double digits and fall rapidly as interest rates of around 2% began to depress consumer demand.
The NIESR said it expected the Bank to keep raising rates until they hit 3% and hold them in place longer than expected to bring inflation down to 3% by the end of next year.
While around 80% of mortgage borrowers use fixed rate products, millions of them will need to remortgage at higher interest rates within the next year. Rising mortgage rates are also fueling private rental costs, which have already risen sharply in recent years.
The think tank said pay rises below inflation would become entrenched and by 2026 would mean real earnings, after accounting for inflation, would be 7% below the pre-Covid trend.
Jagjit Chadha, the director of NIESR, said the new prime minister should “focus economic policy on redistributing resources to the most financially vulnerable households and maintaining public services”.
He said it made economic sense to protect vulnerable families, renewing the institute’s call for an increase in Universal Credit payments of £25 a week at a cost of £1.35billion from October 2022 to March 2023.
The government is also set to increase the energy subsidy from £400 to £600 for 11million low-income households, at a total cost of £2.2billion, he said.
Chadha added that “to turn some of the leveling rhetoric into reality, the government should consider doubling financial support for the Towns Fund from £4.8bn to £9.6bn and expanding the attributions of the UK Infrastructure Bank; increasing its capital from £14 billion to £50 billion”.