Yahoo Finance UK inflation to peak at 7% in April as household inequalities widen
UK inflation could peak at 7% in April this year, which could see the wealth gap between the rich and poor widen as the poorest struggle to make ends meet due to the rise in living costs.
Economists at the National Institute of Economic and Social Research (NIESR) launched a scathing attack on the Bank of England (BoE) for "creating" an inflation crisis that risks dragging the UK into recession.
The think tank warned that many families would be left £1,000 ($1,352) worse off a year, despite chancellor Rishi Sunak’s $9bn package to help offset rising energy bills.
In January prime minister Boris Johnson and Sunak confirmed that the government would go ahead with planned tax increases in April, adding to the cost of living squeeze.
What this means for the economic outlook:
Inflation and interest rates
"Inflation is nature's way of telling the economy to slow down, that is happening," NIESR deputy director Paul Mortimer-Lee said.
The think tank made an upward revision of its forecasts for UK inflation to reach 7% in April and average 5.9% in 2022 and 3.3% in 2023. It expects four BoE interest rate hikes this year followed by more in 2023.
He warned that there is a risk that the UK "might need higher rates still to bring inflation down," which could be "very costly" in terms of unemployment.
It forecasts interest rates to stop at 1.5% next year and inflation to remain "significantly" above that.
The BoE "got behind the curve by at least six or probably nine months" when it came to rate rises and is now "playing catch-up", Mortimer-Lee added. "Being too reactive is what has given us this predicament."
He added that the "dynamics" we are seeing for inflation at 7% is the highest "we've seen since 1982", and getting it down could require tougher measures.
BoE's inflation forecast is in line with NIESR's, expecting it to reach 7% by Spring this year and cooling off after that.
Growth is tiring – inflation in 2022 is at 5.9% and wages are at 4.8% #EconTwitter #UKEconomicOutlook #Economy pic.twitter.com/UJ69QGtEIM
— National Institute of Economic and Social Research (@NIESRorg) February 8, 2022
Wages and employment
NIESR said wages will determine whether inflation or incomes take the strain, with real wages expected to fall further in 2022, despite a tighter labour market.
Despite unemployment falling further, to average 3.9% in 2022, average earnings are forecast to increase by 4.8% – this is 1.1% below the consumer price inflation (CPI).
It comes after BoE governor Andrew Bailey urged Brits last week to limit their pay bargaining to prevent the country sliding into a wage-price spiral, as annual inflation is already running at a 30-year high and predicted to top 7% in April. This is more than triple the BoE target of 2%.
"I'm not saying nobody gets a pay rise, don't get me wrong, but I think what I'm saying is we do need to see restraint in pay bargaining otherwise it will get out of control," Bailey told BBC's Radio 4 on Friday.
Mortimer-Lee told a web event on Tuesday that it was not workers' jobs to keep inflation low. It said that BoE governor was wrong to ask employees to practice restraint when asking for pay rises
"It’s not an individual employee’s job to do the BoE’s work for it," Mortimer-Lee said. "I think that the governor is making an appeal that won’t be heeded."
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The graph shows income and consumption #Inequliaties across regions in the UK #EconTwitter #RegionalInequality pic.twitter.com/38E2GY2vOW
— National Institute of Economic and Social Research (@NIESRorg) February 8, 2022
Inequality
NIESR highlighted income inequalities across regions in the UK, with households in parts of the North West, Wales, Northern Ireland and pockets in the South East hit the hardest.
Adrian Pabst, deputy director at NIESR said there is an "increase in inequalities in terms of incomes and assets" between households and a "very worrying" rise in destitution – as much as a 30% increase.
It predicts that 2.5 million Britons could be living in extreme poverty by 2024. In addition "300,000 children could be in need of free school meals in order to have one warm meal a day," Pabst added.
He noted there are short term policy options to alleviate the issues. NIESR proposes a modified and expanded Winter grant scheme worth £3bn to help households.
The think tank also presented data for the first time showing the impact of inflation on household budgets. Households with lower incomes spend 23% of their budget on food and energy, compared to 16% in median households.
The findings mean that the rise in energy and food prices is hitting poor households the hardest. This could represent up to 10% of total expenditure. For example, someone who is only on a £120 per week income might have to spend £10 more on energy and food than they are currently, Pabst explains.
GDP
NIESR expects UK GDP to grow by 4.8% in 2022 and 1.3% in 2023.
CPI is forecast to average 5.9% this year – despite rising interest rates. It is expected to decline from a peak in the second quarter of 7% to 4.7% by the end of the year.
"If temporary, this inflation may facilitate some important relative price shifts," NIESR said.
Watch: What is inflation and why is it important?
