Britain’s worst cost of living crisis in three decades won’t peak until the tail end of this year but the Bank of England will be more aggressive in raising interest rates than was thought as it battles soaring inflation, a Reuters poll found.
Renewed coronavirus lockdowns in China and Russia’s invasion of Ukraine have deepened supply chain issues which were only just recovering from the havoc wrought by the pandemic, sending global prices rocketing.
Britons face the added headache of spiralling energy prices, higher taxes and ongoing repercussions from leaving the European Union.
“Previous bouts of inflation we’ve had were mainly concentrated on individual items like petrol which you could try and avoid,” said Paul Dales at Capital Economics.
“But at the moment it is so widespread and also concentrated on things we can’t avoid like electricity, gas, food.”
Asked when the cost of living crisis would peak, seven of 13 respondents to an additional question in the May 12-17 poll said the fourth quarter. Three said next quarter and three said by the end of next month.
The government has come under increasing pressure to support household incomes and nine of 12 respondents to another question said it should do more now. All said support should be aimed at lower-income households.
Prime Minister Boris Johnson said last week his government would “do things” in the short term to help Britons but did not go into any details.
Official data due later on Wednesday is expected to show inflation reached a 40-year high of 9.1% last month – more than four times the BoE’s 2% target.
Participants in the poll saw little let up with inflation averaging 8.3% next quarter from 8.7 in the current one, an increase from the 7.9% and 8.4% in April’s survey.
Bank Governor Andrew Bailey said on Monday the current surge in inflation was the central bank’s biggest challenge since it gained independence in 1997 and rising food prices were a major worry.
Earlier this month the Bank said inflation could be more than 10% later this year. Fuel bills jumped 54% in April and the BoE now sees a further 40% increase in October.
“Looking at the months ahead, the road to double-digit inflation is still firming, with services and food inflation still on the up. But we will need a few more beats – or more price pressures in the pipeline to build – to get there,” said Sanjay Raja at Deutsche Bank.
However, upgraded medians from last month in the latest Reuters poll still suggested inflation would gradually decline from here but wouldn’t reach target until the end of next year.
In December the BoE became the first major central bank to raise borrowing costs and has lifted Bank Rate in regular moves from its record low of 0.10% to 1.00%.
Medians in the poll showed it rising again to 1.25% in June and to 1.50% next quarter before a pause ahead of an increase to 1.75% in the second quarter of 2023.
In an April poll it wasn’t expected to reach 1.25% until next quarter and 1.50% until early 2023.
While a little more than two-thirds of respondents had a 1.25% forecast for end-Q2 they were more divided over where the Bank Rate would be by end-December. Fifteen saw it below 1.50%, 22 saw it at that level while 19 expected it to be higher – with the top forecasts at 2.25%.
The Bank has warned Britain could face a recession and economists replying to an extra question said there was a median 35% chance of one within a year. That was slightly higher than the 30% given in a separate Reuters poll for the euro zone.
No respondent had two consecutive quarters of contraction in their forecasts, the technical definition of recession. But quarterly forecasts for this year were downgraded and recession probabilities were in a wide range, from 15% to 100%.
The economy will grow 3.7% on average during 2022 and then expand 1.3% next year, median forecasts of nearly 70 economists showed, down from the 3.8% and 1.7% given last month.
(For other stories from the Reuters global economic poll:)