Inflation in the UK in April officially reached a 40-year high of 9 per cent, and economists warn that the worst is yet to come.

Consumer price inflation is expected to reach double digits later in 2022 as energy, food and consumer prices continue to rise, and the Bank of England warns it cannot stop the surge alone.

The bank predicts that the CPI will reach a high of about 10.25 percent, and most economists agree that this is generally correct, but there is some disagreement as to how stubbornly high inflation will be.

In March 1982, CPI inflation was last 9% higher than in April 2022, at 9.1%, according to simulated ONS figures.

How high will inflation rise and will it continue?

The Bank of England currently expects the CPI to peak at “around 10 per cent” this year.

While inflation is expected to eventually fall, it will for some time remain above the Bank of England’s 2 per cent target, with the central bank expecting normalization only in 2024.

On average, according to city forecasts in May, in the fourth quarter of this year, the CPI rate will fall to 7.8 percent.

However, the forecasts behind this average range from 4.4 percent to as high as the Capital Economics forecast of 9.9 percent, according to documents from the Ministry of Finance.

However, it is important to note that many of the lower forecasts documented below were made a few months ago, and inflation has risen sharply since then.

According to the latest forecasts, the inflation range at the end of 2022 is 9.9 percent for Capital Economics to 6.8 percent for UBS.

The city firm RSM UK believes that the peak of inflation may occur in October, when the regulator Ofgem once again increases energy prices.

What do you think the city will have inflation in the 4th quarter of 2022?  Those marked with an asterisk * are the latest updated predictions

What do you think the city will have inflation in the 4th quarter of 2022? Those marked with an asterisk * are the latest updated predictions

What does the city think will be where inflation will be in the 4th quarter of 2023?  Most forecasters expect it to calm down by then, but JP Morgan still has a 4% forecast.  Again, those marked with an asterisk are the most recent predictions

What does the city think will be where inflation will be in the 4th quarter of 2023? Most forecasters expect it to calm down by then, but JP Morgan still has a 4% forecast. Again, those marked with an asterisk are the most recent predictions

What causes a surge in inflation?

Inflation in energy prices was a key factor in the CPI, jumping from 24.8% in March to 69.6% in April after the last 54 percent jump in the price limit.

Meanwhile, inflation in food rose from 5.9 percent to 6.7 percent, and in services – from 4 percent to 4.7 percent.

RSM UK economist Thomas Pew said: “There should be no doubt about that now [Monetary Policy Committee]’e implied that recent jumps in energy and imported goods inflation are contributing to rising inflation in the rest of the economy.

“We think things are even worse ahead. Food price inflation will continue to rise for the rest of the year, potentially reaching 10 percent, and gasoline prices have not fallen despite falling world oil prices.

“Finally, in October Ofgem is likely to raise energy prices by another 30-40 percent.”

In recent months, energy spending has made an increasing contribution to the CPI rate

In recent months, energy spending has made an increasing contribution to the CPI rate

The CPI rate is expected to return to around 2% by at least 2024

The CPI rate is expected to return to around 2% by at least 2024

Can inflation fall faster than expected?

The Bank of England does not expect inflation to return to the 2 percent target in “about two years,” but some City analysts are more optimistic about the term.

On average, according to May forecasts, the CPI rate in the UK will be 2.8 percent by the fourth quarter of next year, close to the average in the years after the global financial crisis.

But some believe that by October next year the CPI will be much lower, such as Societe Generale, which forecasts a level of just 1.1 percent.

Will rising rates and inflation lead to a recession?

The Bank of England is currently raising interest rates in an attempt to cut inflation, but remembers that raising rates too quickly could throw the economy into recession.

The Bank’s own figures point to a slight recession with a decline in GDP of about 0.25 percent since the end of this year.

This is expected to continue until 2023, and in 2024 will return to weak growth.

However, analysts at Peel Hunt note that these forecasts are “based on current market expectations regarding interest rates and government policy.”

“As a result, they may well be more pessimistic than reality,” they added.

“Inflation has clearly become more prevalent, and food and energy prices are still expected to rise materially.

“The recent depreciation of the sterling against the dollar is likely to worsen cost growth.

“In these circumstances, the Bank has no choice but to continue to raise interest rates to stabilize the currency and support demand if it wants to meet its obligations to return inflation to 2 percent.”

The Bank of England's GDP forecast based on market interest rate expectations

The Bank of England’s GDP forecast based on market interest rate expectations

The bank says it “can do nothing about global supply or energy prices that are currently pushing inflation,” but “if import prices for energy and goods stop rising at the same rate, inflation will automatically fall over time.”

He also warned that the stupid tool to raise interest rates “does not work immediately … it takes time to act fully.”

But given that inflation is likely to remain high for some time, rising interest rates are unlikely to affect the standard of living of Britons – except that the cost of borrowing will become more expensive.

Andrew Tally, technical director of Canada Life, said: “As the Bank of England expects inflation to exceed 10 per cent later this year, we know the worst is yet to come.”

“But the peak, when it comes, tells us only part of the story. How long inflation stays high will determine our standard of living for years to come.

“People tell us that they are already tightening their belts, reducing energy consumption, going out and eating less often or changing their shopping habits.

“But there is a limit to what people can do, especially if high inflation persists until next year. Further state intervention is likely. “

“Reduk of the 1970s has already come”

Barry Norris, CEO of Argonaut Capital:

Inflation today compared to the 1970s

“Today, inflation in the UK, as measured by the CPI, has reached 9 per cent and 11 per cent, which is a new cycle high.

“In October 1973, OPEC imposed its first oil embargo on the West, bringing the price of crude oil from $ 3 billion to $ 11.65 by March 1974.

“Our embargo on Russian oil has witnessed a more modest rise in crude oil prices to date from $ 90 a billion to $ 115 a billion. At the end of 1973, the British RPI was only 10 per cent, which is below the 11 per cent observed today.

“Inflation in the UK peaked at 26 per cent in 1975 and averaged 13 per cent over the decade.

Interest rates today compared to the 1970s

“With the Bank of England’s base rate of 1 per cent, the UK has negative real interest rates of -8 to -10 per cent depending on which inflation rate is used.

“It is now an investment myth that central banks in the early 1970s allowed inflation to get out of control through a free monetary policy. In fact, by mid-1974 – when the FTSE ALL stock index had already fallen 70 percent since its peak in 1973 – the UK had positive real interest rates, in stark contrast to today’s

The CPI of Great Britain in the 1970s

The CPI of Great Britain in the 1970s

Real interest rates in the 1970s

Real interest rates in the 1970s

“Even throughout the decade of the 1970s, monetary policy was tougher than it is today: average base rates were 9.3%, 12.5% ​​RPI and negative real rates were only 3.1%. In the United States in the 1970s, the Fed’s average rate was 7.3% versus 7.1% inflation – in other words, a positive average real interest rate of 0.2%

“In the 1970s, there was also no ‘QE for printing money.’

“In the 1970s, there was also no such thing as an ESG, which limited the accumulation of capital from supply in areas of the ‘old economy’, which would ultimately get rid of supply bottlenecks.”

The 2020s will be an inflationary decade

“The redoubt of the 1970s has already come. The 2020s prove to be an inflationary decade on a par with the 1970s.

“While the energy and commodity shock to date has been mild, real interest rates in the US have entered an unprecedented negative level and are approaching extremes since the UK stock market crash in 1975.

“While central banks can control aggregate demand, they can do nothing with supply bottlenecks. This will continue to be widespread without capital accumulation in the “old economy” sectors, which, in fact, may be hampered by higher nominal interest rates.

“The only long-term cure for high commodity prices is a sustainable bullish commodity market, where companies are again encouraged to reinvest in new supplies.”

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