Economist view UK: The year ahead

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Inflation, and the cost-of-living crisis it has triggered, continue to be a significant worry in the UK. There is however finally growing confidence that inflation may fall markedly over this year. Partly that reflects easing supply chain disruptions but most importantly, UK wholesale gas futures prices have dropped as European storage levels have stayed high with mild weather and lower demand.

Indeed, if futures prices prove accurate, consumers may see average energy bills even below the current Energy Price Guarantee level of £2,500 in the second half of this year.

 

Chart to show how from later this year, utitlity prices may subtract from, not add to, UK inflation.

We also expect Europe’s energy crisis could be resolved as new long-term supplies to replace Russia’s are secured – gas, but also non-fossil fuels. This should lower costs and boost confidence for firms and households alike.

Conditions in the labour market also remain very tight, vacancies, for example, have slipped but still almost match the number of unemployed. The risk has, if anything, risen as employees secure wage settlements that exceed productivity gains, fuelling costs for firms, some of which are passed onto consumers. This in turn limits the fall in our inflation forecast.

And those refinancing existing mortgages – over 1.4m households this year – will see their spending power on other items fall.  As a result, we continue to expect weak GDP outturns this year.

Chart 22: Chart to show house price affordability for mortgage holders has crated as rates have surged

The Monetary Policy Committee will be mindful that cumulative rate hikes, have been faster than in recent tightening cycles.  Over time, this stands to weigh on inflation, via its negative impact on economic activity and should allow the MPC to start cutting rates again from Sep ’23 onwards.

 Commentary provided by Investec Bank Plc

 

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