Yahoo Finance UK cost of living to rise as BoE upgrades inflation forecasts
The UK is facing a cost of living squeeze after the Bank of England (BoE) predicted that inflation will be heading to 5% early next year, its highest level in a decade.
Under the Bank’s new forecasts, wages after tax will not keep pace with inflation over the next two years, coming as a major blow to households across Britain.
Real post-tax labour incomes are expected to fall by 1.25% in 2022, and decline another 0.75% in 2023, worse than previously expected. It comes as the energy crunch and supply chain disruptions have driven up prices, and are continuing to hit business and consumers.
Andrew Bailey, governor of the BoE, said that UK households are already starting to feel the impact of rising prices.
“I’m very sorry that’s happening,” he told the BBC’s Radio 4 Today Programme. “None of us want to see that happen.”
“Inflation is clearly something that bites on people’s household income. I’m sure they’re already feeling that in terms of prices that are going up.”
Inflation in the UK is currently 3.1%, ahead of the Bank of England's 2%.
Watch: What is inflation and why is it important?
On Thursday, Threadneedle Street surprised the markets by keeping UK interest rates at record lows of 0.1%, to see how the jobs market manages with the end of the furlough scheme.
“The labour market looks tight, but the missing piece of evidence is what has happened to unemployment since the scheme finished,” Bailey said.
The Monetary Policy Committee (MPC) voted by a majority of 7-2 to maintain the Bank rate as it is. However, this sent the pound plummeting as much as 1.5% against the dollar (GBPUSD=X) as traders had expected a hike to 0.25%.
It did not rule out a rate rise at its next meeting in December, signalling that rates are expected to rise in the “coming months” as inflation is set to grow.
Read more: Expectations grow of a UK interest rate hike before Christmas
Bailey had previously voiced concerns about rising inflation, saying he was uneasy about consumers starting to see the rise as a permanent feature. In October, he said that the Bank would “have to act” to curb the accelerating inflation.
However, he told the BBC on Friday: “Putting interest rates up, I'm afraid, isn't going to get us more gas."
“We thought it was likely that rates would have to rise. I think it was necessary to give that warning," he said.
Neil Wilson of Markets.com said: “There were several opportunities in recent weeks to lean against the aggressive market pricing to gently nudge the market in the right direction, but the governor elected not to do that.
“The feeling is now that the BoE under Bailey has lost credibility and we will not be able to read as much into his remarks as we have done. This is not a good situation for a central banker to be in.”
Watch: Will interest rates stay low forever?
