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Inflation will hit UK economic growth this year as consumers are hit by rising prices, economists warn today.
The EY Item Club has cut its forecast for UK economic growth this year to 4.9%, down from 5.6%, as the squeeze on households’ spending power and the omicron variant slow the recovery.
In its latest quarterly assessment of the economy, EY predicts inflation to hit 7% in the spring, its highest level since 1992. That will mean people will see their real wages fall this year (in the biggest squeeze on households on record).
EY predicts the Bank of England will respond by hiking Bank Rate to 1% by the end of this year — having lifted them to 0.5% last Thursday.
On the upside, EY says the UK GDP grew 7.3% in 2021, up from the 6.8% predicted in its previous forecast.
Hywel Ball, EY’s UK chair, says:
“The forecast shows that the economy’s bounce back in 2021 was stronger-than-expected and Omicron’s economic impact is likely to be temporary and limited. While the economy and UK businesses may have a softer launch pad for growth this year, they will still benefit from a number of tailwinds in 2022 and 2023.
“But blowing in the opposite direction will be a squeeze on household spending power which is expected to be a bigger headwind for the economy than the Omicron variant. Inflation is set to reach its highest level in thirty years by the spring and will be well ahead of pay growth.
“Although the latest forecast says that the economic scarring from the pandemic is likely to be minimal, policymakers still face the challenge of how they help support households through the forthcoming squeeze on their finances and give companies the confidence needed to unlock business investment. The push towards Net Zero certainly creates an opportunity for investment growth.”
Financial services firm Deloitte has warned that the economic picture is also looking darker. It reports that consumer confidence during the last quarter of 2021 as people were hit by higher household bills and inflation.
The UK cost of living squeeze is set to worsen, with the chairman of Britain’s biggest supermarket chain warning that food price inflation will soon hit 5%.
John Allan, who has chaired Tesco since 2015, told the BBC’s Sunday Morning programme that he was well aware people on very tight budgets were having to choose between food and heating.
“In some ways the worst is still to come – because although food price inflation in Tesco last quarter was only 1%, we are impacted by rising energy prices.
Our suppliers are impacted by rising energy prices. We’re doing all we can to offset it … but that’s the sort of number we’re talking about. Of course, 5%,”
European stock markets are set to start the new week with small gains, with the FTSE 100 index up 0.3% in pre-market trading.
- 7am GMT: German industrial production for December
- 7am GMT: Halifax house price index for January
- 3.15pm GMT: Treasury committee hearing: is inflation back to stay?
- 3.45pm GMT: ECB president Christine Lagarde testifies to the European Parliament committee of Economic and Monetary Affairs