Britain is still heading for a recession, but skyrocketing living costs could slow down, Bank of England economists have said.
Inflation is set to soar to more than 13% with average energy bills set to jump by 80% in October, from £1,971 to £3,549.
Interest rates have been increased from 1.25% to 1.75% - the biggest rise for 27 years, and the economy is expected to shrink every three-month period from October until 2014, by as much as 2.1% according to Bank of England forecasts.
BoE govenor Andrew Bailey sidestepped questions on whether Liz Truss ’s expected energy package could spike a rise in living costs, but he did not deny a recession could lead to lower growth.
Asked by the Commons Treasury Select Committee if economists were hoping a recession would drive inflation down and later increase economic growth, Mr Bailey said: “The recession – I hope it doesn’t happen – but obviously we have forecast it because we think it is sadly the most likely outcome because of the actions of Russia and the impact on energy prices.”
If Ms Truss froze the energy cap at current levels it could mean inflation has already peaked.
The Bank’s chief economist Huw Pill told MPs: “If we do fall into a recession… I think it’s important to emphasise that’s a consequence of the impact of higher energy prices on the real incomes of UK residents, because we are a net importer of energy.
"What we are buying from the rest of the world has gone up in price very, very significantly relative to what we’re selling to the rest of the world.”
He added that her plans could cause headline inflation to “net-net” decline in the short term.
Economists at Goldman Sachs said a cap on energy bills would lead to prices falling more quickly, with inflation slowing to 2.4% by December.
But it remains uncertain as to what could happen when the cap is lifted.
The cost of living is skyrocketing at the fastest rate in 40 years with inflation currently standing at 10.1%.
Chancellor Kwasi Kwarteng suggested more borrowing will be “necessary” in the short term to help people with bills.
Mr Bailey later met with Mr Kwarteng and agreed that getting inflation under control is vital to tackling the challenges that the increasing cost of living is causing.
