UK inflation will top Bank of England two per cent target until end of 2024, EY claims

Inflation will top the Bank of England’s two per cent target for over a year, hobbling UK economic growth and eroding workers’ finances, new forecasts out today claim.

Prices are set to ease much slower than previously expected due to food and energy costs remaining elevated, according to consultancy the EY Item Club.

UK inflation will average 7.6 per cent this year, above the 6.2 per cent forecast by the group in April, extending the squeeze on family finances, with annual pay growth not projected to beat price increases until 2025.

Households will come under further pressure after the Bank raises interest rates two more times to a peak of 5.5 per cent from their current level of five per cent, the report said.

Higher prices and interest rates will be a slow burning drag on the UK economy, mainly driven by consumers reining in spending and businesses shunning investment.

As a result, the EY Item Club has more than halved their 2024 GDP growth forecasts to 0.8 per cent from April’s 1.9 per cent forecast, although the country is on track to dodge a recession.

The Bank of England has lifted interest rates at the most aggressive pace since the 1980s, up to five per cent from near zero in December 2021, in response to sky-high inflation. 

Monetary policy operates with a lag, meaning it takes time to constrain growth, convincing the EY Item Club to downgrade their medium-term GDP forecasts. Rate cuts are not pencilled in until the second half of 2024.

Output is poised to expand slightly quicker than feared this year at 0.4 per cent.

Hywel Ball, EY UK chair, said: “The economy is moving past the series of shocks which have buffeted it in recent years, but their repercussions are long-lasting and holding back UK growth.”

Energy bills – shoved higher by Russia’s invasion of Ukraine roiling international gas markets – are much higher than their long-term average, while food prices continue to race ahead at more than 17 per cent.

City analysts last week cheered numbers from the Office for National Statistics that suggested UK inflation has finally entered the early stages of a much tipped decline. June’s rate fell faster than expected to 7.9 per cent from 8.7 per cent, mainly caused by lower petrol prices.

Experts said UK growth prospects are dependent on the cost of living ebbing, allowing the Bank to consider shifting interest rates lower.

“The inflation and interest rate outlook is a key risk for the forecast. Should inflation prove more stubborn than expected, the prospect of even more rate rises than we expect will come very much into play,” Martin Beck, chief economic advisor to the EY Item Club, said.

Scorching food prices have partly contributed to keeping inflation above forecasts. The EY Item Club doesn’t think it will come back to the Bank’s two per cent target until the end of next year.

Governor Andrew Bailey and co have not hit that goal since July 2021. However, Prime Minister Rishi Sunak will meet his target of whittling inflation down to around five per cent by the end of 2023.

On an annual basis, inflation will average 3.4 per cent in 2024, up from the 2.5 per cent forecast three months ago.

House prices could slump 10 per cent from their peaks due to tighter mortgage rates cooling demand, the EY Item Club said.