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Recession: the price Britain will pay to control inflation | Cost of living crisis

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Rising unemployment. Inflation above 10%. Energy prices are soaring. The standard of living has collapsed. The message from the Bank of England was clear: the 1970s are back.

The word stagflation did not appear in the more than 100 pages of the Threadneedle Streets monetary policy report. Yet a period of weak growth and rapidly rising prices is precisely what the Bank says is in store for the UK. The current rebound from the lockdown will be short-lived and, in a real blast from the past, the economy will be dragged into recession to bring inflation under control.

The pain is not likely to go away quickly. The economy is expected to contract by 0.25% in 2023 and remain weak for the next two years. Unless things improve significantly, the next legislative elections will take place against a backdrop of weak growth and long queues.

Just like in the 1970s, the Bank says that external factors are mainly to blame. In 1973, it was the Yom Kippur war that led to inflation of 25% in mid-1975. This time it’s war in Ukraine. The Bank forecasts another 40% increase in the energy price cap in October, bringing the average annual household bill to 2,800.

There may be arguments about whether the UK is technically heading into recession because the Bank is not forecasting two consecutive quarters of falling output, but it will certainly feel like it. The standard of living is about to take its biggest hit in decades. In another echo of yesteryear, the pound plunged in currency markets following the Bank’s interest rate decision.

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Six months ago, the Bank expected inflation to peak at 5%. He now thinks it will hit just over 10%, by far the highest level since Threadneedle Street gained operational independence 25 years ago.

The Bank says there is little it can do to prevent the damage to household budgets and corporate profit margins from rising global energy profits, and that its task is to achieve the goal of government’s 2% inflation while minimizing damage to the economy. Faced with the dilemma of worrying more about the risk of recession or entrenched inflation, the Bank opted for a middle course, raising interest rates by a quarter point to 1%, their all-time high. since early 2009. But the vote was not unanimous: three of the nine members of the Monetary Policy Committee (MPC) wanted an increase of half a point.

Having been too optimistic about the economy in the past, the Bank may now be too gloomy. There are two reasons for this. The first is that the Threadneedle Streets forecast is based on what financial markets think will happen to interest rates and given the prospect of prolonged stagnation, the city’s current belief that the costs of borrowing will peak at 2.5% seems far too high. The Bank says this would cause inflation to fall to 1.3% well below its target in three years. Two members of the MPC think it is possible that no further tightening is needed.

The second reason is that it’s hard to imagine the government watching the economy slide into recession without doing something to ease the pain. The Bank increased the pressure on Rishi Sunak to act and act big.

Sources

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2/ https://www.theguardian.com/business/2022/may/05/recession-the-price-bank-prepared-to-pay-to-bring-uk-inflation-to-heel

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