Higher inflation and recession forecast

The UK is now forecasting an even higher level of inflation than first anticipated, and it has a new prediction on the possibility of a recession later this year. Learn what’s causing it and what the outcomes might be below.

The UK’s latest inflation projection

The Bank of England has announced a new inflation projection of over 13%. Specifically, the central bank believes inflation could reach as high as 13.3%, which outstrips previous projections of around 11%. The base rate has been increased by 0.5 percentage points to try and help, bringing the latest base rate to 1.75% and a rate that hasn’t been seen since the 2008 financial crisis.

Inflation is a normal occurrence that is considered good when it remains close to the 2% target set by the Bank of England. However, inflation can sometimes spiral out of control due to numerous factors. At current, soaring inflation is primarily attributed to increasing energy prices and the Russian invasion of Ukraine. The Bank of England simultaneously predicted that the average household will spend just shy of £300 per month on energy bills come October this year.

Are we heading into a recession?

Due to the shape of the economy after the COVID pandemic and rising inflation, the new economic outlook places the UK in recession by the end of the year. A recession is defined as when GDP shrinks in two consecutive quarters, which is expected to happen in the third and fourth quarters of 2022.

Although there are similarities between current events and the 2008 financial crisis, the predictions don’t suggest the dip in GDP will be as deep as it was in 2008. However, forecasts are indicating that a recession would last just as long, with the Bank of England suggesting the economy will keep shrinking for over a year.

The UK may have artificially avoided a recession already this year. The Queen’s Jubilee celebration added an extra holiday in the second quarter, which caused GDP in the third quarter to artificially increase.

Can the BoE base rate save us?

Increasing the base rate to reduce inflation is a proven economic model. When you deter people from spending and borrowing and instead encourage saving, the costs of products and services will reduce.

However, there is a fine line between increasing interest rates to get inflation under control, and increasing interest rates to add further and immediate financial strain on households.

During times of soaring inflation and a pending recession, households naturally buckle down the hatches and try to spend less. Some experts have argued that increasing interest rates in the current climate doesn’t have the same degree of effect, considering consumers are already pulling back from spending. However, the counterargument is that not doing anything could make the situation even worse.

September 2022