Analysts warn that domestic gas and electricity bills could rise by £600-£1,000 a year – up to £3,000 – if wholesale gas prices are kept higher than the ongoing war.
Petrol prices, which hit a peak in January when they started falling towards £1.40 a litre, are going back to record highs of £1.50 and above. In some parts of the country, they have already exceeded 1.60 pounds per liter.
Rising energy costs have kept inflation on track to reach 7% or 8% by the spring, and possibly higher in the summer, eating into the disposable income of middle-income earners and pushing many people with low wages into poverty. Used to be.
The combined effect on the bottom two-thirds of households would be to slow the economy, which has relied on consumer spending to a turbulent high during a decade or more of public spending cuts.
Rishi Sunak plans to make the cost of living crisis worse by raising taxes – National Insurance will increase by 1.25% in April and income tax through a freeze on thresholds, allowing more people to pay tax at the standard rate and More people will be brought in to pay higher tax rates.
The Bank of England has its own plan to increase borrowing costs for thousands of small and medium-sized businesses and millions of mortgage payers who face high-cost loans in the near future if not directly.
Before the Russian invasion of Ukraine, financial markets were expecting interest rates to rise by at least one percent this year. Some city economists believed Threadneedle Street was on course to raise the base rate to 2% by the middle of next year.
It can seem difficult to argue over the economic situation when soldiers and civilians are dying. But it won’t help Ukraine if policymakers push the West into recession
With the rise in inflation, increased taxes and a rise in interest rates, it is no wonder that the GfK Consumer Confidence Index for February fell to -26. This was its lowest level since February last year and not far from its worst level of -34 in April and May 2020. In February 2020 it was at -7.
It is true that many people plan to fly on vacation to spend their pandemic savings, but they are in the minority, though in large numbers. Most are grappling with their energy suppliers’ forecasts of an additional £700, £800 or £900 on their energy bills this year made before the war broke out.
Should the Bank of England proceed with raising interest rates to reduce high inflation? Should Sunak poke a hole in everyone’s take-home pay in April to rebuild public finances? The answer should be no and no.
Even International Monetary Fund staffers, who delivered their ruling on the UK economy last week and are not known to have any socialist tendencies, said the tax burden should shift to higher earners so that the Treasury should To offer more support to the middle and low. Income.
The Washington-based lender of last resort, which will face a different dilemma this week when it considers requests from Ukraine’s government for financial aid, knows when to resolve without offering additional financial aid to British ministers. Stupidity would be the worst affected, the energy crisis could push the economy into recession.
As far as the Bank of England is concerned, it will have to allow inflation to rise without raising interest rates, knowing that heavy pressure on living standards will likely automatically reduce demand and reduce pressure on prices.
It will be difficult for the anti-inflation warriors inside Threadneedle Street to leave the price rise and fall without action, but in the current environment with additional borrowing costs, declining consumer spending, a recession next year will be almost certain.
When soldiers and civilians are dying, it can seem difficult to debate the economic situation in Britain. But it won’t help the people of Ukraine if British policymakers, along with their bland counterparts in the US and the European Union, drive the West into recession.
Thankfully, there is every possibility that the US Federal Reserve will oppose raising interest rates at its next meeting, and the bank should follow suit. This will send a positive signal: that at least central banks understand.