Bailey under fire as inflation heads towards 18.6%

Andrew Bailey is under fresh pressure to get the cost-of-living crisis under control after economists predicted inflation is heading towards 20 per cent. 

As he prepares to jet off to the central bankers’ summit held annually in Jackson Hole in the US state of Wyoming, Bailey was faced with forecasts from investment bank Citi that inflation could hit 18.6 per cent, its highest level in almost 50 years. 

The eye-watering figure – which exceeds the Bank’s own predictions of a 13.3 per cent peak in inflation in October, and is almost double July’s 10.1 per cent – will intensify criticism that Threadneedle Street was too slow to act when prices began to overheat last year. 

Andrew Sentance, a former member of the Bank’s interest rate-setting Monetary Policy Committee (MPC), said members of the nine-strong panel had been ‘complacent and ineffective’. 

The Office for National Statistics, meanwhile, published revised figures for UK growth in 2020 that showed the economy actually shrank by 11 per cent in the year the pandemic hit – the worst downturn since 1709 and even more severe than the 9.3 per cent previously thought. 

Now the recovery from that slump is being hampered by redhot inflation – but that has not only been an issue for the UK. The US has tried to combat price rises with big interest rate hikes, and even the eurozone – whose major economies have been battered by the energy crisis – is bumping up its benchmark rate. 

Higher rates are designed to bring inflation down, by encouraging saving rather than spending. The Bank of England tentatively began to hike its base rate from the pandemic record low of 0.1 per cent in December, initially in steps of no more than 0.25 percentage points. 

Citi is predicting higher gas prices will cause the UK’s household energy bill cap, set by regulator Ofgem, to be lifted from its annual level of £1,971 to £3,717 in October

But this month it raised rates by 0.5 percentage points – the biggest hike since 1995 – as it became clear inflation was spiralling out of control. The European Central Bank (ECB), which has been juggling the prospect of a recession in Germany, also hiked rates by 0.5 percentage points in July and looks set for a similar move in September. 

The US Federal Reserve has completed two 0.75 percentage point rate hikes in its own battle to crush inflation. This is set to add to tensions ahead of this week’s Jackson Hole meeting, as the Fed’s fight against inflation causes a headache for other central banks. The higher US rates go, the more traders flock to the dollar. 

This means the value of the greenback has soared – weakening the pound and the euro and adding to inflation in the UK and Europe, since the currencies do not stretch as far when buying foreign goods. While central bankers will be keen to use the Jackson Hole conference to mine their peers for information and advice, uncertainty is likely to be a key theme of the meeting. 

Inflation around the world is being driven up by sky-high energy prices, sparked first by the resumption of manufacturing and travel after Covid lockdowns and then worsened by the war in Ukraine. 

Citi is predicting higher gas prices will cause the UK’s household energy bill cap, set by regulator Ofgem, to be lifted from its annual level of £1,971 to £3,717 in October. It will be bumped up to £4,567 in January and £5,816 in April, Citi thinks. But this prediction could still prove either optimistic or pessimistic, depending on how the energy crisis is resolved. 

Just last weekend, Russia announced yet again that it will be closing its Nord Stream One pipeline which supplies mainland Europe for three days of ‘maintenance’ at the end of the month, causing prices to spike. 

Michael Hewson, of trading firm CMC Markets UK, said: ‘This continued weaponisation by Russia of its gas pipeline is not only driving gas prices ever higher, but it’s also pushing up the price of coal, as well as raising concern that this will be an ongoing theme as we get closer to the winter months.’