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The pound fell off its daily high after comments by Bank of England deputy governor Ben Broadbent. Broadbent spoke about the rise in UK inflation, which could reach up to 9% due to the surge in energy prices.

Ben Broadbent’s comments

Speaking at a conference at Gresham College in London, organised by the National Institute of Economic and Social Research and The Money Macro and Finance Society, the Deputy Governor of the BoE highlighted the risks of inflation which has been exacerbated by the war in Ukraine. He said: “From an economic perspective, coming on top of what was already a very steep rise in the cost of globally traded goods, in the wake of the pandemic, the invasion has led to substantial rises in the cost of energy and other commodities. As a big net importer of manufacturers and commodities, it’s doubtful that the UK has ever experienced an external hit to real national income on this scale. From the narrow perspective of monetary policy, it will result in the near term in the difficult combination of even higher inflation but weaker domestic demand and output growth.”

His comments come after the Bank’s Governor Andrew Bailey said that the UK is facing an energy price shock last seen in the 1970s. On Wednesday, Broadbent also referred to the “unpredictable shocks hitting the economy” and that “the appropriate path of interest rates is necessarily unpredictable as well.”

Household bills could rise to £2,500 by autumn

According to the influential forecasting group, EY Item Club (EYIC), normal household energy bills could rise up to £2,500 by autumn. The increase in energy and commodity prices partly the result of the war in Ukraine, will have a serious effect on households and slowdown economic activity. EY Item Club says that rising prices will add to UK inflation which is already at very high levels and predicts that inflation could peak at a 40-year high of 8.5% in April with prices growing by 6% at the end of 2022. The group has warned that the 54% rise in home energy bills this April means that lower-income households could experience an inflation rate of around 10%.

With more energy bill increases expected in October, the EYIC says lower-income households will have to deal with steadily higher levels of inflation relative to higher-income households, that could last beyond 2023. Chief economic adviser to the EYIC, Martin Beck, said that, while the recent Spring Statement included some help for households, consumers will experience the pain of inflation and a squeeze to real incomes: “Consumer spending is a key part of the UK economy, and the expectation has been that the passing of the worst of the pandemic would spur a corresponding consumer recovery. But the war in Ukraine and rising energy prices mean that outlook has dimmed.”

It is already noticeable that “UK shoppers are choosing to shop at discount supermarkets in greater numbers as grocery price inflation reaches its highest level in a decade amid a mounting cost of living crisis.”

Food price inflation, increased by the rising cost of such commodities as wheat and cooking oil has forced shoppers to change their habits and seek ways to save on basic necessities.

The UK’s poorest families are also expected to see the amount of spare cash fall by a fifth this year with £850 less to spend on non-essential items. According to the latest figures from market analysts Kantar, prices are rising the fastest for pet food and savoury snacks but continue to fall for some products such as fresh bacon. Price rises are also increasing due to the rising cost of labour and basic commodities, driven by a combination of Brexit, rising demand after the pandemic and the war in Ukraine.