Energy prices: UK economy facing biggest ‘shock’ in 50 years – horror warning | City & Business | Finance


Speaking today, Mr Bailey warned the UK is facing “a very large shock to aggregate income and spending”. In an event with Brussels-based think tank Bruegel, he added: “Unfortunately, there is more to come on inflation shock.” Mr Bailey noted the shock from energy prices was now worse than any single year in the 1970s, although he observed that, in this case, energy saw sustained years of price volatility. With the cost of living set to rise substantially this year, Mr Bailey predicted lower spending as a result would in the long run help control inflation, suggesting it would return to target in around two years.

Last week inflation was revealed to have reached 6.2 percent, over three times the Bank of England’s official target of two percent.

Mr Bailey said “unfortunately I think it’s best to think there is more to come on that front”, with energy being a key component reflecting the Russian invasion of Ukraine. 

The Office for Budget Responsbility now expect inflation to peak at 8.7 percent later this year. 

The Bank of England has been trying to counter rising inflation through raising interest rates, with three consecutive hikes so far.

Risks to growth and a more uncertain global situation following Russia’s invasion of Ukraine have made the situation increasingly unclear.

The Bank is now left treading a cautious path between controlling inflation and avoiding damage to UK growth and triggering a recession.

Speaking today, Mr Bailey admitted: “We are starting to see evidence of a growth slowdown.”

While raising interest rates can play a long term role in controlling inflation in the short term households are set to be hit by both high inflation and rising borrowing costs.

The Bank was previously criticised last year for lack of clarity in its communications after it avoided raising rates in November following widely perceived heavy hinting.

At the time the Bank cited lack of certainty over the jobs market as part of its reasoning.

Since then the labour market has been seen to perform strongly with unemployment falling and the number of people on payroll rising.

Speaking today Mr Bailey predicted the labour market would get stronger and was in a simillar position to the US which has also begun hiking interest rates.

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