Top market analysts at CMC Markets predict a wave of bad news after UK inflation did not fall as low as expected. The latest Ofgem price cap changes little for household bills, but the end of the two government schemes helped lower inflation. They forecast three bleak scenarios: further squeeze on consumers, another rise in the base rate, or the UK going into recession. There is, however, the cautious chance that the long streak of rate hikes may be nearing an end.
On May 24th, the Bank of England announced that headline CPI fell to 8.7% in April, whereas experts suggest it could have dropped by another 0.5%. This means that prices will still rise sharply, but at a slightly slower pace. April saw a modest decrease in grocery prices, of only 0.1% to a concerning 19.1% annual rise, perpetuating the burden of the cost-of-living crisis on UK households.
Michael Hewson, Chief Market Analyst at CMC Markets, comments: “We already know from the Kantar grocery numbers earlier [that] week that food inflation is slowing. In May, it came in at 17.2%, but the process is looking increasingly glacial.”
Hewson paints a bleak picture for the upcoming months, with three likely scenarios. There may be a rise in the base rate by another 0.25% in June, impacting mortgages; or keeping the base rate at the current level and waiting for inflation to run its course without interference, affecting consumer prices who already deal with food prices that are almost a fifth more expensive than the year before. The third likely scenario for the UK is, similar to Germany, entering a recession, with widespread ramifications like reduced household and business expenditure, reduced demand for debt, and a rise in unemployment.
“For now, the central bank is in the invidious position of having no good options. Do nothing and inflation will take longer to work its way out of the system, squeezing consumers further, raise by 25bps to at least show they are trying to do something, or be more aggressive and push the economy into recession,” Hewson explains.
For the UK to enter a recession, by definition, it would need to register two consecutive quarters of negative growth in GDP. In February, the Bank of England predicted a -0.7% contraction by the end of 2023, compared to 2022, also expecting a shorter and shallower recession than anticipated in November. However, it has now announced that the UK’s economy could, in fact, expand by 0.25%.
Hewson remains sceptical: “The bank now sees 0.2% growth for Q1, and 0.2% for Q2 as well, while upgrading its GDP forecast for 2023 to 0.25% from -0.3% and indicating a 0.75% expansion in 2024. While this is welcome news, it is also important to remember that just over six months ago, the bank was predicting a two-year recession, so their track record is not particularly great.”
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