Title: UK economy faces double threat of inflation surge, recession risk

Jun 29, 2022 03:31AM ET

By: AnalysisWatch

With the U.K. economy battling two major risks in the form of double-digit inflation and a possible recession, the Bank of England faces a dilemma when it comes to raising interest rates further.

The BoE has raised borrowing costs five times since December, and the next rate announcement is scheduled for August 4.

The central bank has said it will act "forcefully," meaning it will raise interest rates more if inflationary pressures become more persistent. But it also expects the economy to grow a little over the next three years.

Below is a summary of the conflicting challenges facing BoE Governor Andrew Bailey and his colleagues, as well as Finance Minister Rishi Sunak.

Consumer prices rose 9.1% in the 12 months to May, the most in 40 years, and the BoE forecasts inflation will top 11% in October as energy bills rise again.

The BoE says there is little it can do to stop inflation in the short term and that its priority is to prevent the jump in prices from driving up longer-term inflation expectations, which would make solving the problem much more difficult.

One of the most widely followed measures of inflation expectations—the Citi/YouGov survey—has risen sharply in recent months, but has shown signs of stabilizing or declining.

Higher inflation expectations could take hold in the economy, primarily through higher wage settlements.

Workers' wages have risen faster than usual, largely due to one-time bonuses paid by employers in an effort to retain and hire employees in the face of severe shortages of applicants to fill vacancies.

In the latest official figures for the three months ending in April, total salaries, including bonuses, rose nearly 7%, compared with about 3% just before the COVID-19 pandemic. Regular salaries were up a little more than 4%.