This month’s 54 per cent rise in the energy price cap has put the cost of living firmly at the top of the news and the political agenda.
Following the increase, a household using a typical amount of gas and electricity can expect to pay nearly £2,000 a year for their energy, and this could go up to £2,600 in several months.
This is clearly unsustainable and simply unaffordable for many households and businesses across the UK, and while the government has taken some steps to try to mitigate the impact, such as cutting VAT for homeowners who want to install heat pumps and solar panels, Chancellor of the Exchequer Rishi Sunak has been widely criticised for not going further, particularly when it comes to helping people claiming benefits.
The Bank of England (BoE) has sought to tackle rising inflation by increasing interest rates over the last few months, and there is widespread speculation about what course the Monetary Policy Committee could take next.
But what weapons are in its armoury at a time when the BoE needs to straddle a narrow line between managing inflation without growth being hit and the UK slipping into recession?
Andrew Bailey, Governor of the BoE, last week told the think tank Bruegel that it is starting to see “evidence of a growth slowdown”, but refused to be drawn on what it would do next on interest rates.
“We have been very cautious on forward guidance language because things are so uncertain,” he commented.
However, Mr Bailey said the fact that growth and inflation are “pulling in different directions” makes it very difficult for the BoE to act.
“This is a big trade-off,” he continued. “I think it’s the biggest trade-off the Monetary Policy Committee has faced in its now approaching 25 years life.”
According to forecasts from the Office for Budget Responsibility (OBR), the UK economy will grow by 3.8 per cent this year. While this hopefully means the economy will avoid slipping into recession, it is still well down on the OBR’s previous estimate of six per cent growth.
The OBR then believes the economy will grow by 1.8 per cent in 2023, 2.1 per cent in 2024, 1.8 per cent in 2025 and 1.7 per cent in 2026.
Mr Bailey went on to tell the thinktank that the UK is facing a “very large shock to aggregate income and spending”, and its biggest economic shock since the 1970s, before warning “there is more to come on inflation shock”.
The annual inflation rate stood at 6.2 per cent in February – a 30-year high – but the OBR believes it could peak at 8.7 per cent in the final three months of the year.
“This is really an historic shock to real incomes,” Mr Bailey commented.
With Russia’s invasion of Ukraine compounding the problem and creating renewed global uncertainty, it is difficult to accurately predict too far ahead and what policymakers will do next.
But with so many households now facing a very real choice between heating and eating, it is clear that the calls for the government to provide more support will continue to get louder.
In March 2022, Citizens Advice saw a third consecutive monthly increase in the number of people getting crisis support. At the same time, the number being referred to food banks or to other charitable support was 44 per cent up on the same time last year.
As a result, Dame Clare Moriarty, Chief Executive of Citizens Advice, believes the energy price cap rise will be “potentially ruinous for millions of people”.