Inflation Will Hit UK Harder Than Any Other Major Economy, Bank of England Warns

People walk past the Bank of England during morning rush hour, in London, on July 29, 2021. (Henry Nicholls/Reuters)

Soaring inflation will hit Britain harder than any other major economy during the current energy crisis, the head of the UK’s central bank has warned.

Andrew Bailey, the governor of the Bank of England (BoE), said that the hit to the UK economy as a result of the energy price shock would likely come earlier and be more intense than for other countries.

“Unfortunately, there is going to be a further step-up in UK inflation later this year because that’s a product of the way the energy price cap interacts with the energy prices we have observed over the last few months,” Bailey told a European Central Bank (ECB) conference in Sintra, Portugal, on June 29.

Andrew Bailey, governor of the Bank of England, gives evidence to the Treasury Select Committee at the House of Commons, London, on May 16, 2022. (PA Media)

“I think the UK economy is probably weakening rather earlier and somewhat more than others.”

The governor said that in the latest inflation data he had seen a shift in the causes of high inflation from high prices of goods that were in short supply after COVID-19, towards goods and services affected by Russia’s invasion of Ukraine.

To address inflation, the central bank has so far raised interest rates five times since December.

Falling Household Income

Latest figures from the Office for National Statistics (ONS) show that household finances have failed to keep up with inflation.

Real household disposable income dropped 0.2 percent between January and March as income growth of 1.5 percent was outstripped by household inflation of 1.7 percent, the ONS said.

Household finances have now been under pressure for a straight year, with rising prices meaning income after inflation has fallen for a record four consecutive quarters.

Darren Morgan, director of economic statistics at the ONS, said: “Both household incomes and spending rose in cash terms in the first quarter, leaving the rate of saving unchanged. However, once taking account of inflation, incomes fell again, for the fourth consecutive quarter.”

Rising Business Costs

As the cost of doing business continues to rise, the business community has urged the UK government to help firms weather a “perfect storm” of spiralling costs and problems recruiting workers.

Shevaun Haviland, director-general of the British Chambers of Commerce (BCC), warned ministers not to impose any more tax increases on businesses.

Addressing the BCC’s annual conference in London, she called for a long-term plan to solve skills shortages as well as immediate action as firms continue to struggle to recruit staff.

She said that UK-E.U. relations must improve, adding: “We need to reduce the red tape and cost burdens currently placed on British businesses to ensure smoother exporting.”

PA Media contributed to this report.