A think tank warns that inflation in the UK will rise to “astronomical” levels over the next year

Inflation will soar to “astronomical” levels over the next year forcing the Bank of England to raise interest rates higher and for longer than previously expected, according to a leading think tank.

The National Institute for Economic and Social Research also predicted a prolonged recession that could last into next year and hit millions of the most vulnerable families, especially in the poorest areas of the country.

The NIESR said higher gas prices and the higher cost of food would push inflation to 11% before the end of the year while the Retail Price Index (RPI), which is used to determine rail prices and pay off student loans, is expected to reach 17.7%. .

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

He added that there would be “no respite” for British households and businesses from “astronomical inflation” in the short term and “we would need to raise interest rates by 3% if we wanted to bring them down”.

As the government faces calls to intervene with more support for hard-pressed families, the NIESR said average income will fall by a record 2.5% this year, leaving millions of families to use savings or expensive credit to pay for heating and food. essential this winter.

In a bi-annual economic survey, the think tank said the number of households without savings is set to double to 5.3 million by 2024. Families in the Northeast, which rely heavily on public sector jobs, were the most likely to see their savings disappear after using them. to pay the daily bills.

The report painted a bleaker picture than most forecasts for the British economy, which tends to underestimate the likelihood of a prolonged period of deflation.

Bank of England officials will make their judgment on the state of the economy on Thursday when the central bank’s Monetary Policy Committee (MPC) makes its final decision on interest rates and publishes its quarterly review.

Most analysts on the majority of the nine MPC members set a vote on a 0.5 percentage point increase in the bank’s base interest rate to 1.75%, pushing most mortgage rates to 3.5%.

Concern about an increase in the cost of living this year has become the number one issue for households, according to recent polls by Ipsos Mori, and has dominated the debate among the candidates vying for the leadership of the Conservative Party.

In May, the bank said inflation would rise slightly above 10% and decline rapidly as interest rates of around 2% began to dampen consumer demand.

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The NIESR said it expects the bank to keep raising rates to 3% and keep 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 need to re-mortgage for higher interest rates over the next year. Higher mortgage rates are also fueling private rental costs, which have already risen sharply in recent years.

The think tank said rising wages below inflation will become entrenched and by 2026 will mean that real income, after inflation is taken into account, will be 7% lower than the pre-Covid trend.

Jajit Chada, director of the NIESR, said the next prime minister should “focus economic policy on redistributing resources to the most financially vulnerable families and maintaining public services.”

He said it made economic sense to protect vulnerable households, reiterating the institute’s call to increase universal credit payments by £25 per week at a cost of £1.35 billion from October 2022 to March 2023.

He said the government should also increase the energy grant from £400 to £600 for 11 million low-income families, at a total cost of £2.2 billion.

Shazha added that “to turn some of the rhetoric of upgrading into reality, the government should consider doubling the Towns Fund’s financial support from £4.8 billion to £9.6 billion and expanding the UK’s Infrastructure Bank conversion; increasing its capital from £14 billion.” sterling to 50 billion sterling.”

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