The Bank of England has warned in one of its weakest ever assessments of the economy that households face the longest and deepest fall in living standards on record as energy bills triple and the UK faces a deepening and plunges into a prolonged recession.
According to the bank’s latest forecasts, the cost of living crisis will continue throughout the next year and only begin to ease in 2024, with the UK economy contracting for quarters in a row.
Inflation will rise to 13.3 per cent this winter, when rising gas prices mean consumers face an average energy bill of £3,500 – up from £1,200 a year ago – the bank said.
With inflation forecast rising sharply from an estimated 9.4 percent just two months ago, prices are now on track to rise sharply through 2023.
The bank’s Monetary Policy Committee (MPC) warned that there was an “extraordinarily large” risk around its latest projections, and that the situation could worsen if gas prices move higher still.
It’s a scenario that analysts believe comes after Russia cut supplies to Europe last month and governments across the continent began to ration supplies.
It expects the economy to continue to shrink all the way through to next year, with the spending power of household income falling by about 5 percent as prices exceed wages.
This would be the biggest drop in living standards since the bank began collating comparable figures in 1960. It would also mean that real earnings in 2024 remain below 2007 levels, marking an unprecedented period of stagnation due to multiple crises.
The acute labor shortage will mean that firms will continue to offer higher wages to recruit skilled workers, but this will be dwarfed by rising cost of living driven by the cost of energy.
Average wage growth would increase to 6 percent – less than half the peak rate of inflation.
Even as the economy grows, further pain remains, 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 in favor of raising interest rates by 0.5 percentage points to 1.75 per cent – the highest since the global financial crisis in January 2009.
It is hoped that the move will drive prices out of control, but it also means that millions of homeowners will face rising mortgage payments, with the average rate climbing to 3.5 percent.
Overall, the economy is expected to shrink by 2.1 percent, meaning the recession will be of a scale comparable to the 1990s and early 1980s, the bank said.
When the country emerges from recession in 2024, the bank expects growth for the next full year to be near zero.
A massive increase in inflation would also affect public finances, adding billions to the pile of government debt and interest payments on bonds that are indexed for inflation.
The grim figures will cause concern for Liz Truss, the favorite to become the next prime minister.
Ms Truss has promised to cut taxes by billions to win over Conservative Party members. His rival in the race for Tory leadership, Rishi Sunak, has attacked the plan as being financially irresponsible.
None of the candidates have made detailed plans on how they will support families grappling with rapidly deteriorating livelihoods.
Among the first to be hit by rising interest rates will be 20 percent of homeowners on variable or tracker mortgages who will see their monthly payments increase immediately.
First time buyers and those whose current mortgage deals are due to expire soon will also have to pay more.
Someone who has pledged £250,000 worth of approximately percentage over 25 years would pay around £942 per month. Following today’s increase of 1.7 percent, someone borrowing the same amount but 1.7 percent would pay £1,029 per month.