Britain could lurch from high inflation into a recession next year with interest rates unlikely to fall until the second half of 2024, economists have warned.
Cuts to energy prices led to Consumer Price Index inflation falling sharply to 6.8 per cent in the year to July, down from 7.9 per cent in June – the lowest rate since February 2022, the Office of National Statistics announced on Wednesday.
But despite the slowdown, economists predict the Bank of England will continue with interest rate hikes next month and well into next year, which would eventually drag the country into a recession.
The prospect of a downturn comes as families across the country struggle with soaring rents, high mortgage rates and record rail price hikes – while food prices also continue to rise rapidly.
“There is a very real risk that a recession may soon overtake price rises as the main economic concern,” said George Dibb, head of the Institute for Public Policy Research’s Centre for Economic Justice.
Dr Dibb warned that interest rate rises would take “up to a year-and-a-half to fully filter through to the economy” and that pressing ahead with more might kill off the UK’s economic recovery.
Chancellor Jeremy Hunt said easing of inflation showed “the decisive action we’ve taken to tackle inflation is working” but he conceded: “We’re not at the finish line.
“We must stick to our plan to halve inflation this year and get it back to the 2 per cent target as soon as possible,” he added.
And prime minister Rishi Sunak insisted the government had a hand in the falling inflation figures, largely by offering energy bill support.
“No one quite understands the scale of what we’ve done to help households,” he told reporters on a visit to Leicestershire on Wednesday.
But he was mocked by Labour, who accused him of wanting to “patronise people by telling them they don’t understand what’s going on. Most families know that it was the Conservatives that crashed the economy and left them worse off, with higher bills and higher prices in the shops,” the spokesperson added.
Labour and the Lib Dems have criticised Sunak on inflation— (PA)
The Liberal Democrats said the PM’s comments were “woefully out of touch”, with spokesperson Christine Jardine, adding: “Does he expect the public to give the Conservative party a pat on the back for crashing the economy and adding hundreds of pounds a month to people’s mortgages?”
While Consumer Price Index inflation has fallen for the second consecutive month, “core inflation”, excluding commodity prices such as energy, remain stubbornly high at a time when wage increases have soared to a new record high.
Andrew Goodwin, chief UK economist at Oxford Economics, said today’s fall in CPI inflation was “very much an energy story”.
He added: “What will concern the Monetary Policy Committee is that services inflation remained high, indeed it came in slightly above the BoE’s expectations. And that came on the back of yesterday’s very strong reading for private sector wage growth.
“The Bank of England has long been concerned about the link between pay and inflation in the services sector, and we think both are likely to prove quite sticky. So while we only expect one more 25bps rate hike in September, we think we will need to wait until this time next year before we actually see bank rate cut.”
The reduction in the headline rate announced on Wednesday was in part driven by gas prices, which fell by 25.2 per cent – a record cut in one month – after earlier volatility sparked by the Russian invasion of Ukraine.
But at the same time, the cost of services rose to a 30-year record of 7.4 per cent – which amounts to the highest rate of increase since March 1992.
Pushpin Singh, senior economist at the Centre of Economics and Business Research, said that “beyond the headline rate of inflation, other indicators show the persistence of price pressure in the economy.
“The economy is still overheating, and this isn’t helped by elevated wage growth, which has the potential to exacerbate matters via a wage-price spiral,” he warned.
“It is likely that the prospect of interest rate cuts in the near-term is not a consideration for the Bank of England given this, and we only expect interest rates to be cut in May next year at the earliest,” he added.
And even when interest rates do start to come down, inflation will only fall in “a slow, gradual manner”, close to the Bank of England’s target of 2 per cent, by 2025, he said.
Asked by The Times whether people would feel better off in a year’s time, Mr Sunak said: “That’s my job, to make sure that not just happens but they feel that that’s happening. You can start to see now that there is a prospect of wages growing faster than inflation going forward...
“I’m really optimistic about the future. We’ve got a challenge right now to overcome but I’m entirely confident we will do it.
“Is it taking a bit longer than anyone would like? Of course it is, but we’re making progress.
“The last couple of months show that the plan is working. We’re making progress. I believe if we stick to it we will get to that point where people see inflation has come down, that they do feel better off. I’m confident we will.”
However, he rejected calls by some Tory MPs to cut taxes now.
“Right now the best thing for the country is to bring down inflation,” he said. “That means being disciplined on borrowing, disciplined on spending, whether that is spending on lots of things — public-sector pay — or indeed unfunded tax cuts.”
Last week, the National Institute of Economic and Social Research (NIESR) warned that the risk of a recession by the end of 2024 was now at 60 per cent.
Responding to Wednesday’s inflation figures, NIESR economist Paula Bejarano Carbo said that “despite the welcome fall in the headline rate, we have yet to see a turning point in the underlying rate of inflation, which remains stagnant at around 7 per cent”.
