Britain’s economy is under pressure from two huge risks: double-digit inflation and the possibility of a recession, leaving the Bank of England unsure how far it should hike interest rates. The Bank of England has hiked borrowing costs five times since December, with the next rate hike slated for August 4.

If inflationary pressures become more persistent, the central bank has stated that it will act “forcefully,” or raise interest rates more steeply. However, it forecasts essentially little economic growth over the next three years.

The following is a description of the competing problems confronting BoE Governor Andrew Bailey and his colleagues, as well as finance minister Rishi Sunak.

Consumer prices increased by 9.1 per cent in the year to May, the biggest in 40 years, and the Bank of England predict that inflation will reach 11 per cent in October, when energy expenses rise again.

The Bank of England says there is little it can do to stop inflation in the short term, and its focus is to prevent the price increase from raising longer-term inflation expectations, which would make the situation much more difficult to solve.

The Citi/YouGov poll, one of the most frequently followed measures of inflation predictions, has risen dramatically in recent months but is now showing indications of stabilising or declining. 

Increased pay accords are the most likely route for higher inflation expectations to become imbedded in the economy.

Workers’ wages have been rising faster than normal, thanks primarily to one-time incentives offered by businesses in an effort to retain and recruit employees amid a severe dearth of candidates to fill vacancies.

Total pay, including incentives, increased by nearly 7 per cent in the most recent official numbers for the three months to April, up from around 3 per cent shortly before the COVID-19 pandemic. Regular compensation has grown by slightly more than 4 per cent.

Both metrics lag behind inflation, resulting in a decrease in most workers’ real income.

Separate data from XpertHR, a pay and personnel data publisher, reveal that yearly pay increases negotiated in British companies have remained at a historically high level.

The combination of the epidemic and Brexit has left Britain’s companies in many areas with a severe shortage of workers, which is another source of concern for the BoE as it adds to wage pressures.

The official gauge of vacancies has reached new highs month after month, while the rate of increase has decreased, one of several signals that the jobs market’s inflationary heat has begun to cool.

The Bank of England is also keeping an eye on how many people are still unemployed. This inactivity rate has dipped slightly, contributing to the first rise in the headline unemployment rate since late 2020 in the most recent numbers, perhaps alleviating job-market inflation pressures.

Normally, a rise in inflation would indicate good economic growth, but not this time.

Prices were already rising around the world as the global economy tried to reopen following coronavirus lockdowns, and Russia’s invasion of Ukraine has exacerbated the problem by further raising gasoline and food prices.

Britain’s economy contracted in April and March and showed no growth in February, the first time it has failed to grow in a three-month period since the outbreak began. It is around 5 per cent smaller than it would have been if the epidemic had not occurred.

The Organization for Economic Cooperation and Development predicts that Britain will have zero economic growth in 2023, the worst performance of any of its member countries except sanctions-hit Russia.

Sunak, the finance minister, upped the government’s support for people dealing with growing living costs in May, and he is under pressure to do more later this year.

(Adapted from USNews.com)

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