Annual UK inflation could hit as much as 15% by early 2023, experts have predicted, as sharp new energy price rises drive up the cost of living.
On the eve of the Bank of England’s latest interest rate decision, the Resolution Foundation think tank said price pressures were likely to be stronger and last longer than the Bank had previously forecast .
The Bank’s monetary policy committee, which said in June it expected inflation to reach just above 11% in October, is poised to raise official borrowing costs on Thursday for a sixth consecutive month despite signs that the ‘economy is weakening.
The latest monthly service sector health check from S&P Global and the Chartered Institute of Procurement and Supply found that activity among private companies operating in the services sector has fallen to its lowest level since the lockdown of early winter 2021.
Tim Moore, Chief Economist at S&P Global Market Intelligence, said: “The reduced levels of discretionary spending by consumers and efforts by businesses to contain spending due to rising inflation have combined to compress demand in the service economy.
“The near-term outlook also looks subdued, as new order growth remained near a 16-month low in June and business optimism was the second weakest since May 2020.”
The Resolution Foundation noted some good news on inflation as some commodity prices fell, including oil, but this was being offset by rising gas costs. As a result, the UK’s annual energy price cap is now expected to rise from just under £2,000 to around £3,500 when the new October figure is announced at the end of the month.
Jack Leslie, senior economist at the Resolution Foundation, said: “The outlook for inflation is highly uncertain, largely driven by unpredictable gas prices, but developments in recent months suggest the Bank of England is likely to anticipate a higher and later peak for inflation – potentially up to 15% in early 2023.
“While market prices for some commodities such as oil, corn and wheat have fallen from their peak earlier this year, these prices have not yet fed into the costs of consumer and remain considerably higher than in January”.
In its annual assessment of the UK, the Organization for Economic Co-operation and Development (OECD) said a strong post-pandemic recovery was coming to an end and the economy faced slower growth with inflation growing and labor shortage.
Mathias Cormann, OECD Secretary-General, said: “Like other economies around the world, the UK economy faces a number of headwinds, with pre-existing structural challenges exacerbated by the pandemic and war of aggression of Russia against Ukraine.
“The key to stronger economic growth and better opportunities will be stronger productivity growth.”