The Bank of England estimates that UK average income will fall by 2% this year after accounting for wage growth, inflation, tax hikes and benefit changes – the sharpest drop since comparable records began in 1990. The economy is expected to come back broad from a pinch when it needs to fire all engines to rid itself of the slowdown caused by the pandemic.
The BoE has nevertheless raised interest rates twice in the past three months and has indicated that more hikes are to come, in what Andrew Bailey of the government described as a “tough message” to hard-pressed people. Britain has delivered – without a rate hike, the economic pain would be worse than inflation.
“We haven’t raised interest rates today because the economy is roaring,” Mr Bailey said on 3 February, explaining the latest hike. “We face a trade-off between strong inflation and weak growth.”
The British economy expanded by 7.5% over the past full year, according to Friday’s data. However, by the end of 2021, growth had slowed significantly, with production declining by 0.2% in December compared to November, as the Omicron version increased.
Meanwhile, annual inflation in the UK was 5.4% in December, and the BoE expects price hikes to exceed 7% this spring, easily outpacing wage increases, which are expected to average 3.75% this year. have hope.
In the US, inflation is also rising, but the recovery from the pandemic is more advanced than in the UK. The UK only regained ground lost from COVID-19 in November 2020 after its worst recession in a century; The US passed its pre-pandemic peak in the second quarter of last year. The Federal Reserve is expected to begin raising short-term interest rates next month.
“Inflation in the US is destroying real income at a time when demand growth is very strong,” said Robert Wood, UK economist at Bank of America. “In the UK, it is reducing real income when demand has not yet recovered to where it was two years ago.”
Supply-chain disruptions, massive US consumer demand for commodities, and rising energy prices are driving inflation in advanced economies. US consumer prices rose 7.5 percent year-on-year in January, a four-decade record.
Whereas inflation in the US has been fueled by stimulus that has fueled consumer spending and macroeconomic growth, inflation in the UK has been driven in large part by rising energy costs and rising prices of imported goods.
The risk that central banks are trying to address with tighter policy is that high inflation persistence as people expect it and demand higher wages in return.
Mr Bailey has faced criticism in the UK after he urged workers to refrain from demanding inflation-beating wage increases, which would fuel inflation. Four members of the BoE’s nine-member rate-setting panel voted in February for a rate hike larger than the quarter by one percentage point, reflecting concerns that inflation is seeping into other parts of the economy.
Mr. Wood said, “The needle they are trying to thread here is tightening enough to contain inflation, but not so much that when you add that to a decline in spending power, you create a recession.” We do.”
Economists expect inflation to fall back as energy prices level, although it will remain around 5% in 2023.
For British households, a crisis point will be in April, when the UK’s energy regulator is set to raise limits on what companies can charge consumers for gas, which is used to heat most homes in England and Wales and almost A third is done for fuel. UK electricity generation.
Bulk gas prices have risen sharply in recent months. This means that electricity and gas bills for a typical household will rise by £700 next year – the equivalent of about $949 – a 50% increase over 2021. In response, Treasury chief Rishi Sunak announced a support of £350 per family, more than half of which is effectively a loan.
Inflation has already wiped out a 6.6% increase in minimum wage employers are mandated by the government to pay workers over the age of 23 – in the form of a £1,000 wage increase for a full-time worker by Mr Sunak. The bill was announced in 2014 when he announced the budget. Last defeat.
Despite calls from within the ruling Conservative Party to wait until the cost of living crisis subsides, the government is going ahead with a £12 billion tax hike in April.
“It’s a two-pronged squeeze on those whose wages have not yet been realised before the global financial crisis,” said Ann Pettifor, an economist who recently gave evidence on inflation to Parliament’s Treasury Committee.
Squeeze is set to reduce consumer spending for the rest of the year, with growth slowing in the UK, even as Omicron’s influence has waned.
Economists expect households to increase spending from savings accumulated during the pandemic, but most of them are concentrated in high-income households.
Low-income households—for whom energy bills make up a large portion of expenses—have little cushion to fall back on.
Referrals to food banks have already hit record highs, according to Citizens Advice, which provides assistance to people with legal, credit, housing and other problems. There has also been an increase in the number of people seeking advice on managing energy debts.
Billy McGranaghan has seen growing difficulties with the community food bank in West London run by his charity Dad’s House. “We thought we had seen the worst of it during the lockdown and the pandemic,” he said.
Instead, the number of people dependent on its food bank has increased, and now includes some who donated to it themselves.
As well as providing food, Dad’s House now tops gas meters for the worst affected, Jennifer Cartledge, who is on a budget of £2,000 a month to support herself and six children aged 3 to 15. is fighting for. ,
She stopped working as a nanny during the lockdown and then separated from her husband, meaning she needed to stay at home to take care of the children. He eats canned beans and potatoes so that he can afford to send his children on school trips. “You have to save every penny,” she said. “It’s getting tough.”
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