UK: 9% inflation spike expected this week
If economist predictions are correct, the consumer price index will be at its highest level since 1990.
When official data are announced this week, inflation in the UK is expected to soar to 9%, and worries of a downturn are building.
The cost of living is rising quickly and economists predict that inflation will rise from 7.1% in March to 9.1% in April.
This may put the consumer price index at its highest level since 1990, when the UK was experiencing one of the worst postwar housing slumps and a full-fledged recession.
While food and energy bills soar in the country, incomes have taken a hit, and economists at ING stated that the month-on-month rise reflects a 54% jump in household gas and electricity bills since April.
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The Bank of England has anticipated a jump in inflation to beyond 10% after the summer, blaming rising energy costs. “We are less sure that it will get as bad as that, but then again inflation has consistently surprised to the upside,” it said in a statement.
The labor market data will be released on Tuesday, a day before the inflation statistics. Central bank officials are especially concerned about recent salary increases of around 5.4%, as well as the extent to which workers would expect wage increases to keep up with growing inflation over the next year. This is the much-feared forerunner to a wage/price spiral, which might drive up inflation for years to come.
Some members of the Bank's monetary policy committee (MPC) anticipate wage demands will skyrocket – and firms will be obliged to raise prices to recuperate greater production costs – not just this year, but also next year, and potentially beyond 2024.
Two of the nine-member group suggested earlier this month that they considered the contrary — that wage growth had already peaked.
Tony Wilson, director of the Institute for Employment Studies, believes that the labor market's tightness will keep wage growth high. The UK has record amounts of vacancies and an increasing proportion of employees changing employment, making it harder for firms to fill open positions.
Hundreds of thousands of businesses are functioning with razor-thin profit margins and are aware that their consumers are tightening their budgets, limiting their ability to pay greater wages. Rather than raising prices, these companies are likely to lower output or service levels.
According to Wilson, "A restaurant is more likely to stop opening at lunchtimes than take on a second chef on much higher wages."
Unemployment is expected to stay low at 3.8%, unchanged from the previous month, however, this figure is inflated by the 500,000 people, largely over-50s, who have left the labor force in the last 18 months.
Since 2019, the Brexit effect has denied firms access to 500,000 foreign workers who were scheduled to enter the UK labor market.
According to Wilson, the combined million-worker difference was significant when attempting to explain the situation of the UK labor market in comparison to other similar-sized countries like France.
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Wilson suggested that the government concentrate its efforts on assisting people who had become economically inactive to return to employment. Instead, the sole policy action is at the Bank, where there is a discussion of raising interest rates to combat inflation at the MPC meetings in June and August.
However, Paul Dales, chief UK economist at consultancy Capital Economics, said his projection that the base rate could climb from 1% to 3% was now at risk of being unduly optimistic.
The threat of a recession is a major factor. After flatlining in February, the economy declined by 0.1 percent in March.
