UK Economic Outlook Winter 2021

Riding Inflation

Inflation has risen from 0.6% in December 2020 to 5.5% in January 2022. It is expected to peak at around 7% in the second quarter of 2022, falling back slowly to 4.7% by the end of the year. The largest drivers of inflation in recent months have been supply-chain disruptions, in particular to the supply of gas. The Bank of England has suggested that they are on the look-out for a so-called wage-price spiral. We don't see evidence of this yet but will obviously be monitoring over the coming months.

Living Standards

Household incomes are forecast to grow by around 1.1% in real terms in 2022, less than our forecast for annual average price inflation of 5.9% for 2022. Unemployment is forecast to remain low by historical standards at around 4%, which does help to support household incomes. But record vacancies do not seem to be translating into rapidly accelerating wage growth, though some sectors are seeing bigger rises.

Policy 

The government is planning a fairly swift tightening of fiscal policy, with the withdrawal of Covid-related measures and a rise in national insurance contributions. We think that this planned fiscal tightening is too quick, and is one reason for the slow response of the Bank of England on interest rates. It is a mistake for the government to be dragging on household incomes and consumption at the same time as the Bank is tightening.