The surge in energy prices triggered by the Russia-Ukraine conflict will drive inflation beyond eight per cent, generating the worst squeeze on household living standards since the second world war.
Sustained elevated prices for oil and gas will heap an additional 1.5 percentage points on to the cost of living, resulting in a 2.2 per cent erosion in Brits’ real disposable income this year, according to calculations by Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Consumers will slash spending to offset pressure on their budgets from rising prices, causing UK economic growth to slump.
A cut back in household spending, which accounts for 60 per cent of the UK’s GDP, will result in “a period of below trend growth,” Tombs said.
Gas and oil prices last week shot up on concerns Russia may squeeze energy supplies in retaliation to Western sanctions to hobble the country’s economy after Moscow launched a full-blown invasion of neighbouring Ukraine.
If wholesale gas prices continue on an elevated trajectory, “the price cap will increase by about 33 per cent in October,” Tombs added.
Brits are already facing a historic squeeze on their spending power from an expected 7.25 per cent inflation peak, a 1.25 percentage point national insurance hike and swelling energy bills.
Tombs now thinks inflation will hit 8.2 per cent in April.
Investors are pricing in a 100 per cent probability of the Bank of England hiking rates at each of its next three meetings as it continues its tightening cycle to tame inflation. The Bank’s next rate decision is on 17 March.