FAMILIES SET FOR RECORD SQUEEZE

UK facing recession ++ Inflation to soar over 10% and hit 40-year high ++ Growth to plunge ++ Biggest pay drop since 1990

WORKERS face a record squeeze on their incomes as surging inflation threatens to drive the UK into recession.

In a grim assessment, the Bank of England slashed growth forecasts and predicted a doubledigit rise in the cost of living. It said the economy would shrink from the end of this year as soaring bills leave struggling households with less cash to spend.

It predicted that employees would see their post-tax pay fall by 3.25 per cent on average in real terms in 2022 – the biggest drop since records began in 1990. And the Bank said it now expected inflation to peak above 10 per cent within months, a 40-year high.

This is five times the official inflation target of 2 per cent and the highest level since 1982, when Margaret Thatcher was only in her first term as prime minister.

Experts warned the UK was on

course for a bout of ‘stagflation’, where output stagnates but prices soar. This is worrying for households because it often comes with higher unemployment.

The cost of living crisis will put the brakes on consumer spending, throwing the Covid recovery into reverse, the Bank said.

This will cause the economy to shrink by 0.25 per cent next year, down from previous predictions it would grow by 1.25 per cent.

In another worry for households feeling the pinch, rock-bottom levels of unemployment will begin to rise as cash-strapped businesses are forced to cut their costs.

The Bank thinks joblessness will be back up to 5.5 per cent within three years, from a low of 3.6 per cent this summer.

Responding to the downbeat forecasts, traders sold off the pound, leading to it slumping by more than 2 per cent against the dollar to a near two-year low of $1.23.

American stock markets tumbled yesterday after the US Federal Reserve raised its own interest rate by 0.5 percentage points on Wednesday. The grim outlook will pile fresh pressure on Chancellor Rishi Sunak to help households following a string of deeply unpopular tax rises – particularly if yesterday’s local elections go against the Tories.

Boris Johnson and his ministers are expected to meet next week to discuss how they can ease the cost of living crisis.

This week the Prime Minister suggested the Government would announce further support for struggling families, admitting: ‘There is more that we can do.’ In an attempt to keep a lid on soaring prices, the Bank hiked interest rates again yesterday to 1 per cent – the highest level since 2009.

Central banks usually increase interest rates when prices are rising fast in a bid to encourage saving rather than spending.

This was the Bank’s fourth rise since December – the first time its policymakers have moved so aggressively since they gained independence from the Treasury 25 years ago. Three members of the nine-strong Monetary Policy Committee, which sets interest rates, even voted for a further rise, to 1.25 per cent.

But despite the Bank’s action, households will still feel the pain. On one measure overall living standards are set to slump by 1.75 per cent this year as wage growth fails to keep up with the leap in prices. This would be the worst hit to family budgets since 2011, when real disposable income fell by 2.5 per cent.

Yesterday’s rate hike will be painful for borrowers and mortgage holders, who will see the cost of their debt rise.

Bank governor Andrew Bailey said: ‘I recognise the hardship that this will cause.’

But his deputy Ben Broadbent emphasised that the hit to households from rising interest rates would be tiny compared with the inflation shock they were already suffering.

Mr Sunak earlier this year pushed ahead with controversial tax grabs, despite warnings from economists. He has raised national insurance contributions, frozen income tax and inheritance tax thresholds and failed to lift the state pension in line with inflation.

Julian Jessop, an economist at the Institute for Economic Affairs, said: ‘There is never a good time to raise taxes, but now is terrible. The tax cuts announced in the spring statement undid just a sixth of the overall increases announced by Rishi Sunak since he became Chancellor. At the very least, the Government needs to take more action on energy prices by the autumn to prevent the Bank’s gloomy economic forecasts from becoming reality.’

Just before the Bank gave its statement, Shell reported record profits of £7.3billion for the first three months of the year, sparking fresh calls for a windfall tax.

Critics of Mr Sunak have argued that he should be heaping some of the inflation burden on to firms gaining from it, rather than leaving households to shoulder the load.

Bosses at supermarkets surveyed by the Bank predicted that food prices could shoot up by more than 8 per cent this year.

Combined with rising energy prices, this will disproportionately affect low-income households, which tend to spend a far greater portion of their cash on food and bills.

Clothes retailers surveyed by the Bank said they might have to raise their prices by between 5 per cent and 8 per cent.

Energy prices accounted for most of the inflation surge, the Bank said.

‘Never a good time to raise taxes’