Inflation will hit its highest level in the UK in recent history, going against the Bank of England’s (BoE) expectations this year, according to leading analysts in London’s financial district. The UK’s mainstream measure of inflation will accelerate to a peak of 6.8 per cent this April, propelled higher by swelling energy bills, according to investment banking giant Goldman Sachs.
However, the cost of living will climb above Goldman’s predictions if the Omicron strain solidifies the global supply crunch, potentially igniting a series of rate hikes from the BoE. “If Omicron is seen as net inflationary, then there is the risk of interest rates hitting one per cent by the May meeting of the monetary policy committee (MPC),” said Goldman.
The last time the UK interest rates were that high was February 2009 following the financial crisis. If Goldman’s predictions come about, it will continue a trend of the BoE consistently undershooting its inflation forecasts since the onset of the Covid-19 crisis.
BoE thinks the cost of living will peak at six per cent this spring. It’s reluctance to tackle inflation head on prompted a former rate setter to warn that the central bank will need to increase rates quicker to tamp down on the rising cost of living. The Bank “is clearly behind the curve in responding to this inflation surge,” said Andrew Sentance, a former member of the BoE’s monetary policy committee.
He added: “The MPC will be in catch-up mode in 2022. Interest rates are likely to end this year at 1-1.5 per cent, but further rate rises will be needed to keep inflation in check.” The MPC will announce its next rate decision on 3 February. The consumer price index, the UK’s main measure of inflation, has never risen above 5.2 per cent, according to Office for National Statistics records dating back to 1998.
A combination of sky-high wholesale gas prices, supply chain disruptions and huge demand driven by consumers spending cash a little more liberally after the Covid-19 unlocking will push inflation higher in 2022, said Goldman. Households are set to be stung in April when the force of inflation culminate, led by a possible 50 per cent rise in the energy price cap to account for historically high wholesale gas prices.
Meanwhile British businesses are actively planning to hike prices as they scramble to survive amid rising costs, according to official figures. UK firms are intending to raise prices five per cent this year, according to the BoE’s survey of chief financial officers of British businesses. The survey of around 5,500 businesses underlines the strain firms are under to remain profitable amid rising costs.
Almost three in five firms expect to lift prices in the next three months, the highest proportion ever recorded by the British Chamber of Commerce (BCC). Intention to lift prices is in various parts of the UK economy including retail, manufacturing and construction.
A toxic combination of an energy crunch in Europe, an ongoing labour squeeze and a recovery in oil demand has swelled firms’ costs across the board. The Office for National Statistics estimate prices for materials used by British factories have jumped over 14 per cent over the last year, with crude oil prices alone up over 80 per cent.
As a result, businesses are having to rejig prices to protect their margins and remain viable in the long term. A reduction in income arising from a slowing down in spending as consumers exercised greater caution in the face of the Omicron variant is strengthening businesses’ incentives to hike prices. In the last quarter of 2021, UK firms lost seven per cent of sales due to the Covid-19 crisis, the BoE said.
Andy Jalil
andyjalil@aol.com
The writer is our foreign correspondent based in the UK
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