UK consumer price inflation looks set to reach a 30-year high of 6% or more in April, but the big question for the Bank of England and the general public is how quickly it will then fall.
Last month, the Bank of England became the first major central bank in the world to raise interest rates after the coronavirus pandemic hit the global economy.
Investors are now betting on four more rate hikes in 2022, taking a bank rate of 1.25% because price increases in the UK, like many other rich countries, look less transient than previously thought.
Peak inflation will hit consumers’ purchasing power as soon as they face tax hikes in April, making it harder for the UK economy to recover from the coronavirus crash in 2020.
Bethany Beckett, an economist at Capital Economics, said household disposable income in real terms will fall this year, slowing economic growth to 3.7% in 2022. In November, the Bank of England forecast growth of 5.0% this year.
The current BoE forecasts released in November point to consumer price inflation of 3.5% in 2022 before falling to 2.25% in 2023, close to the BoE’s target of 2%.
Then, after a further rise in gas prices, the central bank said in December that it had raised its estimate of peak inflation to around 6% in April.
This means that the Bank of England is likely to raise its inflation forecasts for the full year again on February 3, along with what many investors believe will be another hike in the bank rate to 0.5%.
Households face a sharp increase in gas bills of about 50% – or slightly less if the government steps in to soften the blow – in April when the regulated price cap is due to be raised.
Paul Dales, the chief economist at British consultancy Capital Economics, nearly doubled his inflation forecast for 2022 as a whole to 4.0% from a previous estimate of 2.2%.
The UK will receive a record amount of liquefied natural gas shipments this month, which will help bring down the day-ahead price of natural gas from a peak of over 450p a therm at the end of December to around 200p last week. was still much higher than its level of about 50 pence a year ago.
Philip Shaw, an economist at Investec Bank, said inflation could reach 2.5% in 2022 if the recent fall in gas prices continues and results in tariff cuts at the biannual regulatory review due in October.
Beyond the usual variables, from gas prices to the impact of weather on food prices, another key driver of this year’s inflation is what’s happening to global supply chains, which have been hit hard by the pandemic.
This was most evident in the automotive market, where a shortage of microchips led to a reduction in the production of new cars, causing prices for used models to rise by 27%.
However, a survey of purchasing managers of British manufacturers last month showed a decline in prices paid for inputs from a near-record high.
But analysts are monitoring the impact of the Omicron option on China, where a strict approach to eradicating coronavirus outbreaks has led to the closure of suppliers vital to global manufacturers in 2020, pushing up prices.
The Bank of England’s biggest concern is not so much what inflation will do in the coming months, but whether it will cause long-term inflationary pressure, mainly on wages.
Some companies have responded to the post-Brexit and COVID-19 shortage of workers by increasing pay for certain positions.
Food retailer Gregg’s this month announced a pay increase for its employees.
A survey of manufacturers found that recent wage increases have ranged from 2% to 3% but in some cases have gone as high as 14%, while 45% of firms have yet to agree on a pay deal as they expect more clarity on inflation and other factors.