Britain will plunge into a year-long recession this autumn, with households hit by the deepest drop in living standards on record, the Bank of England has warned.
In one of its darkest assessments of the UK’s economic outlook yet, the bank’s Monetary Policy Committee (MPC) said inflation will now peak at 13.3 per cent in the last three months of this year as average energy bills eased from 1,200 £ in 2021 will triple to £3,500 by October.
The economy is now forecast to contract for five straight quarters for the first time since the 2008 global financial crash.
The inflation forecast had risen sharply from the 9.4 percent forecast three months ago and prices are now on track to continue to rise rapidly throughout 2023.
This means that the cost of living crisis will continue throughout next year and will not ease until 2024, according to the bank’s latest forecasts. Real household incomes are expected to fall by about 5 percent on average over a two-year period – the deepest fall since records began in 1960.
Whoever becomes the next prime minister will be concerned about the grim numbers.
Liz Truss has pledged billions in tax cuts to win over Conservative Party members, while Rishi Sunak has attacked the plan as fiscally irresponsible.
Neither candidate has presented detailed plans for how they would support families struggling through a rapidly worsening cost-of-living crisis.
Rebecca McDonald, chief economist at the Joseph Rowntree Foundation, said: “We already know that 7 million low-income families lost food, heat and even showers this year because they couldn’t afford it.
“While the government may have paused to respond to the cost of living emergency, these families cannot take a vacation from the year of financial anxiety.
“You will wonder why other urgent solutions needed to shore up family finances ahead of winter are not yet implemented.”
Rachel Reeves, Labour’s shadow chancellor, said: “This is further evidence that the Conservatives have lost control of the economy, with skyrocketing inflation set to continue while mortgage and lending rates continue to rise.
“While families and pensioners worry about how they will pay their bills, Tory leadership candidates are touring the country announcing unworkable policies that will not help people get through this crisis.”
Experts said energy costs could rise even further in January, with Investec forecasting bills for the average household will now reach £4,210 in January if regulator Ofgem revises its price cap.
The MPC warned there was an “extraordinarily large” risk associated with its latest forecasts and the situation could deteriorate further if gas prices soar even higher.
Analysts believe that scenario is becoming increasingly likely after Russia cut supplies to Europe last month and governments across the continent began rationing supplies.
Even after the economy starts to grow, more pain lies ahead as unemployment is set to rise from 3.8 percent to 6.3 percent in 2025.
Despite the bleak outlook, the bank’s nine-member MPC voted eight-to-one to raise interest rates by 0.5 percentage points to 1.75 percent – the highest since January 2009.
Overall, the economy is expected to contract by 2.1 percent, meaning the recession will be of a magnitude comparable to that of the early 1990s and 1980s, the bank said.
If the country emerges from recession in 2024, the bank expects growth to remain near zero throughout the following year.
The massive rise in inflation will also hit public finances, adding billions of dollars to government debt and interest payments on inflation-linked bonds.
Andrew Bailey, the bank’s governor, defended the rate hike, arguing that persistent inflation would be “worse” if interest rates were not raised and that low-income households would be hit hardest.
Chancellor Nadhim Zahawi said: “Reducing the cost of living is a top priority and we have taken action to help people through these trying times with our £37billion Household Aid Package, which will provide £1,200 in direct payments to the most vulnerable families and a £400 rebate on energy bills for all.
“We are also taking important steps to bring inflation under control through strong, independent monetary policies, responsible tax and spending decisions, and reforms to boost our productivity and growth.”