Economists are warning that inflation could rise to 3 percent within months, wrecking hopes of Bank of England interest rate cuts in a blow to home buyers.
The Bank of England’s Monetary Policy Committee (MPC) uses interest rates to put a brake on the nation’s spending in order keep the inflation rate at a 2 percent target.
However, rises in prices, such as energy, food and petrol, are fueling increases and the cost of living which means inflation is predicted to hit 3 percent by the spring.
Just a few months ago, City experts were predicting the Bank would cut the base rate four times through 2025, bringing it down the from 4.75 percent to 3.75 percent – or lower.
However, they are now penciling in just one or two reductions, which means the cost of home loans will remain higher than many had hoped.
That is bad news for first time buyers and some 700,000 people who will have to remortgage this year as cheap fixed rate deals come to an end.
New analysis from Bloomberg Economics estimates that household energy costs will add 0.5 percentage points to headline inflation in April.
The fall in the value of the pound against the dollar in recent days means that the cost of importing oil will rise, leading to an increase in petrol prices.
And the nation’s big supermarkets claim that increases in wages and National Insurance – announced in the October Budget – will be passed on to shoppers through higher prices. They claim that food price inflation will rise from 1.8 percent to 4.2 percent by the end of this year.
Andrew Goodwin, chief UK economist at Oxford Economics, told Bloomberg: “We already thought inflation would be higher than the BoE forecasts this year, but the recent rise in energy prices means it’s likely to be higher still.”
The BoE Governor Andrew Bailey and the rest of the MPC now face a difficult decision over whether to continue to keep interest rates high to bear down on inflation which carries a risk of tipping the economy into recession.
Dan Hanson, chief UK economist at Bloomberg Economics, said: “The broader question for the BoE is what they focus on in the coming year if inflation is above target and unemployment is rising.
“The recent inflation episode taught us that inflation expectations can drift,” he said. “That means the Bank is unlikely to support the economy as much as it might have done had it been confronted with the same trade-off prior to the pandemic. The upshot is that it’ll be hard for it to shift away from gradual cuts.”
Deutsche Bank chief UK economist Sanjay Raja also expects higher prices at the petrol pump and for gas and electricity to boost inflation above 3 percent.
“Our biggest worry from a BoE perspective, is that rising inflation to start the year pushes inflation expectations higher too,” he said. “We’re already seeing higher energy and food prices seep into the consumers’ minds and this, we think, could cause some consternation around the policy path.”
Gross Domestic Product (GDP) figures to be published on Thursday are expected to confirm a slowdown in growth since Labour entered power last July.
