Inflation is set to soar higher to 7% this spring – its highest level in 30 years - with household budgets being squeezed and real wages reduced further, economists predicted today.
In its latest quarterly report, the EY Item Club cut its forecast for UK economic growth this year to 4.9% from 5.6%, largely due to inflation-related squeezed budgets.
“Inflation is set to reach its highest level in thirty years by the spring and will be well ahead of pay growth." Hywel Ball, EY’s UK chair.
Food price inflation is the latest thing householders have to worry about with the worst “yet to come” John Allan, chairman of Tesco warned over the weekend.
"Food is a relatively small part of household spending, it's only about 9% … but of course, it's a bigger proportion for those on the lowest incomes," Allan said on the BBC's Sunday Morning programme.
The leading supermarkets are expected to pass on much of their own rising costs to the consumer with lower-income homes most impacted, analysts said.
"Although food price inflation in Tesco over the last quarter was only 1%, we are impacted by rising energy prices; our suppliers are impacted by rising energy prices,” Allan commented.
The Bank of England’s governor Andrew Bailey confirmed that inflation may rise to 7% and not return to normal levels for at least two years.
EY Item expects the Bank of England to further hike interest rates throughout the year, following Thursday’s rise to 0.5% from 0.25%, to start reversing quantitative easing.
Capital Economics, meanwhile, thinks rates will be raised by 0.25% in each of the remaining three quarters in 2022 to 1.25% by the end of the year, while EY forecasts interest rates to end the year at 1%.
The impact of higher mortgage costs was starting to show through in the housing market, economists added, with the 0.3% increase in January the slowest for four months.
The National Living Wage is set to increase by 6.6% in April.