UK braced for further price rises as inflation set to worsen, S&P warns

Pedro Goncalves
·Finance Reporter, Yahoo Finance UK
·3 min read
2
inflation A shopper puts fruit in her basket in a supermarket in London, Wednesday, Aug. 17, 2022. The UK inflation rate has hit 10.1% in the year to July, new figures from the Office for National Statistics have shown. The figure is up from 9.4% in June and is at its highest level in more than 40 years. (AP Photo/Frank Augstein)
High and persistent core inflation is still the main challenge for the UK economy. Photo: Frank Augstein/AP

UK households are in for more misery as inflation will remain high at least until the end of this year, according to S&P.

The global credit rating agency said the UK economic outlook has improved but continues to face headwinds.

S&P now expects a contraction of only 0.5% in 2023, before growth turns positive and averages 1.6% in 2024 to 2026.

However, even as energy prices fall, high and sticky inflation will remain a problem for the households and businesses for most of 2023.

Read more: Inflation rate in surprise jump to 10.4% amid record food costs

“As double-digit inflation and much higher costs of borrowing continue to feed through, the UK's economic situation is set to worsen slightly, in our view, before it starts improving later this year,” the rating house said in a report.

“We now expect the UK economy to shrink by 0.5% this year. Falling private consumption and investment will be only partly offset by growth in government consumption and a positive contribution from net trade.”

Prices rose unexpectedly in the UK last month after three consecutive months of slowing, driven by record food costs.

The Office for National Statistics (ONS) calculated inflation at 10.4% from January's 10.1% although it is still down from a 41-year high of 11.1% in October.

S&P also expects the Bank of England to keep its rate at 4.25% until early 2024, before gradually easing it back to 2.5% in the longer term.

"We see the economy on a somewhat firmer footing going into 2023, supported by what has been a relatively mild winter, which helped household energy bills," said S&P global ratings senior economist Boris Glass.

"We now expect a contraction of only 0.5% in 2023, before growth turns positive and averages 1.6% in 2024-2026.

"We expect the Bank of England to keep its rate at 4.25% until early 2024, before gradually easing it back to 2.5% in the longer term."

The report follows a similar analysis by KPMG which said that although the likelihood of a recession has fallen, UK growth is expected to be negative in 2023.

KPMG warned that the outlook for businesses remains “mixed”, and that Jeremy Hunt’s new measures to boost business investment are likely to have only a temporary effect on UK growth.

Read more: Bank of England raises interest rates for 11th time to 4.25%

“Despite slightly stronger near-term momentum and the boost from the recent budget announcements, ongoing tensions in the banking system and the lingering risk of a recession put a question mark around the outlook for the UK. The good news is that base interest rates have probably already reached their peak,” said Yael Selfin, chief economist at KPMG UK

“Looking ahead, as the economy cools and inflation returns back to target, this may provide the Bank of England with an opportunity for a series of gradual rate cuts next year.

“Nonetheless, structural issues, including skills shortages, slowing workforce participation, and ageing population, dominate the longer‑term risks to the UK outlook."

Watch: Inflation jump deepens UK cost of living crisis

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