More economists warn of cost of living crunch’s drag on UK growth

The squeeze on households’ living standards from the cost of living crunch will drag on the UK economy this year, reveals fresh forecasts published today.

A triple whammy of Inflation topping seven per cent, a heavier tax burden and swelling energy bills is set to erode consumers’ real incomes, prompting a pull back in spending, according to the EY Item Club’s winter economic forecasts.

The organisation, which uses the same modelling as the Treasury to examine the UK economy, yesterday downgraded 2022 growth to 4.9 per cent from 5.6 per cent.

A quicker rate hike cycle from the Bank of England and “a sharper squeeze on households’ spending power” prompted the downgrade, the EY Item Club said.

The new forecasts underline the heavy blow the erosion in households’ living standards this year is set to deal British output.

Demand often cools in economies when inflation outpaces wage increases due to consumers having less room to maintain spending levels.

Inflation has consistently surprised to the upside of consensus expectations in recent months and is expected to trend much higher, prompting a wave of economists to temper their expectations for UK growth in 2022.

The EY Item Club think the cost of living will top seven per cent this spring. Meanwhile, Pantheon Macroeconomics, a consultancy, expect it to hit 7.5 per cent.

The Bank of England – which has consistently undercooked its inflation forecasts throughout the Covid-19 crisis – last week slashed GDP growth forecasts to 3.75 per cent from five per cent previously.

There is “limited evidence” that British exports to the EU have been impacted by Brexit in the first year since the end of the transition period, the EY Item Club said.