UK inflation set to rise to ‘astronomical’ levels next year, warns think tank | Inflation

According to a leading think tank, inflation will rise to ‘astronomical’ levels in the coming year, forcing the Bank of England to raise interest rates higher and longer than previously expected.

The National Institute of Economic and Social Research also predicted a prolonged recession that would last into next year and affect millions of the most vulnerable households, especially in the poorest parts of the country.

NIESR said gas price hikes and rising food costs would send inflation to 11% by the end of the year, while the Retail Price Index (RPI), used to determine rail fares and student loan repayments, is expected to reach 17.7% .

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

He added that in the near term there will be “no reprieve” for UK households and businesses from “astronomical inflation” and “we will have to raise interest rates to 3% if we want to cut it”.

With the government facing calls to intervene with further support for struggling families, NIESR said median incomes would fall by a record 2.5% this year, pushing millions of families out of savings or expensive loans this winter. should use to pay for essential heating and food costs. .

In its biannual economic health survey, the think tank said the number of households without savings would double to 5.3 million by 2024. Families in the Northeast, who rely heavily on public sector jobs, were most likely to lose their savings after using them to pay their day-to-day bills.

The report painted a bleaker picture than most forecasts of the UK economy, which often downplay the likelihood of a prolonged contraction.

Bank of England officials will give their opinion on the state of the economy on Thursday, when the central bank’s monetary policy committee (MPC) will make its final decision on interest rates and release its quarterly statement.

Most analysts have assumed that a majority of the nine MPC members voted to raise the Bank’s base rate by 0.5 percentage points to 1.75%, bringing most mortgage rates to 3.5%.

Concern over the rise in the cost of living this year has become the top issue for households according to recent polls by Ipsos Mori and has dominated the debate between the two candidates vying for leadership of the conservative party.

In May, the Bank said inflation would rise slightly above 10% and fall rapidly as interest rates of around 2% began to weigh on consumer demand.

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NIESR said it expected the Bank to continue raising rates until they hit 3% and hold them in place longer than previously expected, to bring inflation down to 3% by the end of next year.

While about 80% of mortgage borrowers use fixed-rate products, millions of them will have to refinance at higher interest rates in the coming year. Higher mortgage rates also affect private rental costs, which have already risen sharply in recent years.

The think tank said wage increases would become entrenched below inflation and that by 2026 would mean real incomes, taking inflation into account, would be 7% below the pre-Covid trend.

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

He said it made economic sense to protect vulnerable families, and renewed the institute’s call for an increase in Universal Credit payments of £25 a week at a cost of £1.35 billion from October 2022 to March 2023.

The government must also increase energy subsidies from £400 to £600 for 11 million low-income households, at a total cost of £2.2 billion, 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 the contract of the UK Infrastructure Bank to expand; capital increase from £14 billion to £50 billion”.

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