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


Speaking today, Mr Bailey warned the UK was facing ‘a very large aggregate income and expenditure shock’. Speaking at an event with Brussels think tank Bruegel, he added: “Unfortunately there is more to come on the inflation shock.” Mr Bailey noted that the energy price shock was now worse than any year in the 1970s, although he observed that in this case energy has seen prolonged years of volatility prices. With the cost of living expected to rise significantly this year, Mr Bailey predicted lower spending would help control inflation in the long term, suggesting it would return to target in about two years.

Last week, inflation hit 6.2%, more than three times the Bank of England’s official 2% target.

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

The Office for Budget Responsbility now expects inflation to peak at 8.7% later this year.

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

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

The Bank must now tread a cautious course between controlling inflation and avoiding hurting UK growth and triggering a recession.

Speaking today, Mr Bailey admitted: ‘We are starting to see evidence of slowing growth.

While rising interest rates may play a long-term role in keeping short-term inflation in check, households are expected to be hit by both high inflation and rising borrowing costs.

The Bank had already been criticized last year for its lack of clarity in its communications after it avoided raising rates in November following widely perceived heavy hints.

At the time, the Bank cited lack of certainty in the job market as part of its reasoning.

Since then, the labor market has shown strong performance, with unemployment falling and the number of employed people increasing.

Speaking today, Mr Bailey predicted the labor market would strengthen and was in a similar position to the US, which has also started to raise interest rates.

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