Cost of living crisis: Britain warned 15% inflation 'plausible' scenario next year

3 August 2022, 15:13

Inflation could hit 15% next year, according to a think tank
Inflation could hit 15% next year, according to a think tank. Picture: Alamy

By Asher McShane

Experts have warned that inflation in Britain could peak at 15% next year in a dire warning of further misery in the cost of living crisis.

The Resolution Foundation made the prediction for the first quarter of 2023.

The think tank said that the Bank of England’s inflation forecast was likely to be revised upwards tomorrow, leading to what is expected to be the largest interest rate rise in nearly three decades.

Decision makers on the Bank's Monetary Policy Committee (MPC) will increase interest rates from 1.25% to 1.75%, analysts believe, as they try to bring inflation back under control.

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Previous Bank predictions forecast that Consumer Prices Index inflation would peak at around 11% this autumn, before falling back.

The Resolution Foundation warned of further misery, saying that while global commodities, such as oil, have come off their peaks, the price of wholesale gas is likely to end up obliterating household budgets.

"It is now plausible inflation could rise to 15% in the first quarter of 2023," the foundation said.

Gas prices are expected to be around 50% higher this winter than they were following the full-scale Russian attack on Ukraine.

"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% in early 2023," said Jack Leslie, senior economist at the Resolution Foundation.

"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."

According to the latest forecasts from consultancy Cornwall Insight, the energy price cap will remain higher than £3,300 from October to at least the start of 2024.

Analysts will be watching out on Thursday for an inflation forecast from the Bank, and for forecasts for gross domestic product (GDP).

New analysis from the National Institute of Economic and Social Research (NIESR) this week said that the UK is sliding into a recession. So economists will be keen to know the Bank's take.

Eyes will also be on the more immediate interest rate decision.

At the last meeting in June, three MPC members had already voted for the MPC to speed up its rate hikes, as some other central banks around the world have.

"After a number of central banks across the world have picked up the pace of their tightening cycle, the Bank of England is starting to look like something of a laggard when it comes to raising rates," said Luke Bartholomew, a senior economist at asset manager Abrdn.

"We expect this impression to be somewhat corrected next week with the Bank hiking interest rates by half a per cent."

It would be the biggest single interest rate hike since 1995. The last time rates rose by more than 0.5% was 1989.

"Markets are putting an 87% chance on a 0.5% increase to 1.75% at this meeting," said Russ Mould, investment director at AJ Bell.

But the markets are still giving an approximately one in eight chance that rates will not go up by the full half point.

Samuel Tombs and Gabriella Dickens, economists at Pantheon Macroeconomics, argued that market watchers should not take a big hike for granted.

"The MPC's interest rate decision next week is a very close call, but on balance we think the committee will stick to its slow and steady approach," they said.

"The MPC began its tightening cycle earlier than the US Fed and the ECB (European Central Bank), leaving it with less need to rush now," they said.

"We doubt the MPC will judge Bank Rate needs to rise as quickly as markets expect."

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