For more than a year, inflation will be higher than the Bank of England’s 2% target, which will impede UK economic growth and deplete workers’ finances, a new report says. According to consulting firm the EY Item Club, prices are predicted to decrease considerably more slowly than initially anticipated because of the continued high cost of food and energy.
Inflation in the UK climbing
Inflation in the UK is expected to average 7.6% this year, up from the group’s April prediction of 6.2%, further straining household budgets. On the other hand, annual salary growth isn’t expected to outpace price hikes until 2025.
According to the research, after the Bank raises interest rates twice more, reaching a maximum of 5.5 percent from their current level of 5%, households will be put under considerably more stress. People will curtail their spending, and businesses won’t make investments, which will be the main factors contributing to the economy of the UK’s long-term repercussions of increased prices and interest rates.
The EY Item Club has also drastically reduced its 2024 GDP growth predictions from its April forecast of 1.9% to 0.8%, even though the country is on track to avoid a recession. Because monetary policy takes time to take effect and lags, the study also updated its estimates for medium-term GDP growth. It should be noted that rate cuts won’t start until the second half of 2024.
The two percent target won’t be reached soon
According to data released by the Office for National Statistics, UK inflation has finally begun to decline as expected. The rate dropped from 8.7% to 7.9% in June more quickly than expected, mostly due to falling petrol costs.
According to experts, the UK’s economic prospects depend on declining living costs, which enable the Bank to contemplate lowering interest rates. A major risk to the prediction is the outlook for inflation and interest rates. According to Martin Beck, chief economist at the EY Item Club, the possibility of even more rate increases will be quite important should inflation become more persistent than anticipated.
The report anticipates that the Bank’s two percent target won’t be reached until the end of the next year. Governor Andrew Bailey has not been able to achieve this since July 2021. However, Rishi Sunak, the prime minister, has expressed that he will get the inflation down to 5% by the end of this year. Notably, compared to the 2.5% prediction made three months ago, the EY Item Club research predicts that inflation will average 3.4% in 2024.
Why are interest rates rates
In the year ending in June, the Consumer Prices Index (CPI) fell to 7.9%. A peak of 11.1% in October 2022 represented a considerable decline from the 8.7% recorded the month before. Even though the June inflation rate dropped, there is some cause for optimism given the government’s 2% inflation target for the BoE.
One of the main factors contributing to the rapid rise in inflation has been the rising cost of electricity. But this is already diminishing. The energy price ceiling, as established by the regulator Ofgem, is £2,074 as of July 1. The previous cap amount was £3,280 and went into effect on April 1. The government’s Energy Price Guarantee, which estimated the average annual cost at £2,500, had temporarily replaced the cap. A new cap, which is anticipated to be lower once again, will go into effect on October 1, 2023.
