The National Institute of Economic and Social Research also predicted a long recession that would last into next year and hit millions of the most vulnerable households, especially in the worst-hit areas of the country. NIESR said rising gas prices and escalating food costs will push inflation to 11% before the end of the year, while the retail price index (RPI), which is used to set train fares and of student loans, is expected to reach 17.7%. . Stephen Millard, the institute’s deputy director, said the economy would shrink for three consecutive quarters, shrinking 1 percent by spring next year. He added that there would be no “respite” for British households and businesses from “astronomical inflation” in the short term and “we will need to raise interest rates to the 3% mark if we want to bring it down”. As the government faces calls to step in with further support for hard-pressed families, NIESR said average incomes will fall by a record 2.5% this year, leaving millions of families using savings or expensive credit to pay for essential heating costs and nutrition this winter. In its biannual financial health check, the thinktank said the number of households with no savings was set to double to 5.3 million by 2024. Families in the North East, which rely heavily on public sector jobs, were the most likely to see their savings disappear after using them to pay everyday bills. The report painted a gloomier picture than most forecasts for the UK economy, which tend to reduce the likelihood of a long period of contraction. Bank of England officials will give their verdict 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 have written off a majority of the MPC’s nine members voting for a 0.5 percentage point increase in the Bank’s key rate to 1.75%, pushing most mortgage rates to 3.5%. Worries about rising living costs this year have become the top issue for households, according to recent Ipsos Mori polls, and have dominated the debate between the two Conservative leadership candidates. In May, the Bank said inflation would rise slightly above 10% and fall quickly as interest rates around 2% began to dampen consumer demand. Subscribe to the Business Today daily email or follow Guardian Business on Twitter @BusinessDesk NIESR said it expects the Bank to continue raising interest rates until they reach 3% and keep them in place for longer than previously expected to reduce inflation to 3% by the end of next year. While around 80% of mortgage borrowers are on fixed rate products, millions of them will need to remortgage at higher rates next year. Higher mortgage rates are also fueling private rental costs, which have already risen sharply in recent years. The thinktank said below-inflation wage rises will consolidate and by 2026 mean real incomes, after inflation are taken into account, will be 7% below the pre-Covid trend. Jagjit Chadha, director of NIESR, said the new prime minister should “focus economic policy on redistributing resources to the most economically vulnerable households and maintain public services”. He said it was cost-effective to protect vulnerable families, renewing the institute’s call to increase Universal Credit payments by £25 a week at a cost of £1.35bn from October 2022 to March 2023. The government should also increase energy grant from £400 to £600 for 11 million low-income households, at a total cost of £2.2bn, he said. Chadha added that “for some of the leveling off rhetoric to become reality, the Government should consider doubling the financial support for the Towns Fund from £4.8 billion to £9.6 billion and expanding the Bank’s remit UK Infrastructure. increasing its capital from £14bn to £50bn’.
