Grim news about the UK economy keeps mounting. Last week, the Bank of England forecast a 15-month recession, with inflation peaking at more than 13 per cent. The energy price cap, which limits how much households can be charged, is now forecast to soar 80 per cent in October from today’s record levels, pushing many into a dire choice between heating and eating over the winter. Mortgage and rental costs are also rising. Yet with the government paralysed as it awaits the outcome of a Conservative leadership contest that is still ignoring the scale of the problem, there is still no clear and realistic near-term cost of living strategy — just when the most vulnerable need it the most.
The UK faces its worst bout of stagflation — low growth and high inflation — since the 1970s. A reliance on natural gas imports and a sluggish post-pandemic recovery in its workforce means UK inflation is a toxic mix of the energy-driven type facing continental Europe and the wage pressures at play in the US. Underlying the BoE’s stark forecast was the equally bleak calculation that in order to bring inflation down it needed to lift interest rates enough to cool the jobs market and investment, engineering a downturn in the process.
With the central bank now alive to the danger of persistently high inflation, fiscal policy will have to tread carefully as it offsets the cost of living crisis when resources are tight. Weaker growth will shrink any fiscal headroom the Treasury might have had, while the government has already pledged a hefty ￡37bn across various cost of living packages. Moreover, efforts to support households — whether by tax cuts or direct payments — will add further fuel to inflation, which will in turn be met by tighter monetary policy.