Bank of England forecast suggests Britons will soon feel profound economic pain not felt for a generation | Business News

If there’s one message from the Bank of England’s forecast for today, it’s this: If things feel tough today, then wait.

At the end of the year, they will find it much harder.

It’s a message that’s hard to hear – the kind that economics has nicknamed “the bleak science”. But there’s no point in ignoring this.

Inflation has been very high, the bills have escalated; households have been and are being squeezed.

But the Bank’s projections suggest that in the coming months Britons will feel, with a pressure they have not felt in a generation or more, profound economic pain from higher inflation.

The pain of energy bills you can’t pay, of a weekly store that can’t afford it, of being squeezed between stagnant wages and rising costs on the other.

And, according to the Bank, that squeeze would trigger a deep recession.

Its latest forecast suggests that gross domestic product, the most comprehensive measure of economic growth, will shrink by nearly a percentage point in the final quarter of the year. We can argue about whether that fits the technical definition of a recession – although we can also debate whether it’s the right definition for a period of economic stress. deeply economic or is it essentially arbitrary.

Either way, it’s hard to think that many of the Bank of England’s forecasts are as bleak as this one.

To be sure, during COVID, the Bank’s projections of gross domestic product have fallen more than they are saying today. But they also forecast a very strong recovery.

During the financial crisis, the Bank was slow to forecast a recession and did so only when the UK was already deep in recession.

This time is different. Partly because we know that higher energy costs are creeping into the economy, partly because UK energy bill policy means those costs are billed at two points in time. specifically each year, it should be possible to predict when the maximum pain score will be.

As far as the Bank is concerned, that time is later this year, in October when Ofgem next raises the price ceiling, potentially, the Bank said, to an average of around £2,800.

That increase would push inflation up sharply, from its current level of 7% to 9% in the next month or two to more than 10% by year-end.

It will be the UK’s first time facing double-digit inflation since the early 1980s, when prices were falling following the economic crisis of the 1970s.

The 1970s example is a instructive example. Inflation was so high back then that it caused what economists call a wage price spiral. As prices rose, wage-setters raised wages in an attempt to chase prices.

That set off a chain reaction – higher prices lead to higher wages leading to higher prices – which took years for the economy (and failed governments) to resolve.

In short, that is exactly what the Bank wants to avoid. That is exactly why the country was given the independence to set monetary policy in 1997, and why its main goal was to keep inflation low, near 2%.

Obviously we have a long way to go to get there. The question, however, is whether the Bank assesses that a recession, and a period of profound pain, is the only way to prevent a spiral in wages and lower prices.

None of these are appetizing. For a long time, economists and central bankers have talked about the risk of rising prices as if it were an academic threat – something more abstractly spoken of. reality.

They are actually becoming very real. And the economic consequences, as dire as they are now, are becoming more apparent now.

Double-digit inflation; an economy sliding towards a recession; Household income has fallen at an almost unprecedented rate. It is a toxic cocktail of economic forces, and unmistakable.