The cost of living crisis will continue throughout next year and will only start to ease in 2024, with the UK economy shrinking for solid consecutive quarters, according to the Bank’s latest forecasts. Inflation is set to jump to 13.3% this winter when rising gas prices mean consumers face average energy bills of £3,500 – up from £1,200 a year ago – the Bank said. The inflation forecast rose sharply from the 9.4 percent forecast just two months ago, with prices expected to continue rising rapidly in 2023. The Bank’s Monetary Policy Committee (MPC) warned there was “extremely high” risk surrounding its latest forecasts and the situation could worsen further if gas prices move even higher. That’s a scenario that analysts believe is becoming more likely after Russia cut supplies to Europe last month and governments across the continent began stockpiling supplies. It expects the economy to continue to contract throughout next year, with the spending power of household incomes sinking by almost 5% as prices outpace wages. It would be the biggest fall in living standards since the Bank began collecting comparable data in 1960. It would also mean that real earnings in 2024 would remain below the level reached in 2007, marking an unprecedented period of stagnation characterized by multiple crises. Severe labor shortages will mean that businesses will continue to offer higher wages to recruit skilled staff, but this will be tempered by the rising cost of living due to energy costs. Average wage increases will jump to 6 percent – less than half the peak rate of inflation. Even after the economy begins to grow, further pain is in store, with unemployment expected to rise from 3.8 percent to 6.3 percent in 2025. Despite the bleak outlook, the Bank’s nine-member Monetary Policy Committee voted eight to one to raise interest rates by 0.5 percentage points to 1.75 percent – the highest since the Global Financial Crisis in January 2009. It is hoped the move will tame runaway price rises, but it also means millions of homeowners will face rising mortgage payments, with the average interest rate rising to 3.5%. Overall, the economy is expected to shrink by 2.1%, meaning the recession will be of a comparable scale to those of the early 1990s and 1980s, the Bank said. When the country emerges from recession in 2024, the Bank expects growth to remain close to zero over the next year. The massive increase in inflation will also hurt public finances, adding billions to the public debt pile and interest payments on inflation-adjusted bonds. The dire figures will cause concern for Liz Truss, who is favorite to become the next prime minister. Mrs Truss has pledged to cut taxes by billions in a bid to win over Conservative party members. Her rival in the Tory leadership race, Rishi Sunak, attacked the plan as fiscally irresponsible. Neither candidate has laid out detailed plans for how they would support struggling families through a rapidly worsening cost-of-living crisis. Responding to the economic forecasts, Labour’s shadow chancellor Rachel Reeves said: “This is further evidence that the Tories have lost control of the economy, with inflation continuing to soar, while mortgage and loan rates continue to rise. “As families and pensioners worry about how they will pay their bills, Tory leadership candidates are touring the country announcing unworkable policies that will not help people get through this crisis.” Among the first people to be affected by the rate hike will be the 20 percent of homeowners on variable or tracker mortgages who will see their monthly payments rise immediately. First-time buyers and people whose current mortgage deals are soon to end will also pay more. Someone who took out a £250,000 mortgage over 25 years at around 1 per cent would pay around £942 a month. After today’s rise to 1.7 per cent, someone borrowing the same amount but at 1.7 per cent would pay £1,029 a month. However, increases in energy prices will have a much greater impact on people’s disposable income. Speaking after the publication of the MPC’s report, Deputy Governor Ben Broadbent said Andrew Bailey, the Bank’s governor, said persistent inflation would be “even worse” if interest rates were not raised and that lower-income households would be hit hardest.
