The UK chancellor, Jeremy Hunt, has expressed concern about the persistence of Britain’s cost of living crisis after an influential international body predicted the country would have one of the highest inflation rates in the developed world this year.
While the Organisation for Economic Co-operation and Development raised its forecast for UK growth, it also warned that inflation would average 6.9% during 2023.
The OECD’s forecast questions whether the government will achieve its target of halving inflation by the end of the year – one of the five new year pledges made by Rishi Sunak in January.
Headline inflation is expected to slow on the back of declining energy prices and to come down close to the government’s 2% target by the end of 2024. Core inflation – which excludes items such as energy and food – is predicted to be more persistent due to strong inflation in the price of services, only receding to 3.2% in 2024.
Responding to the news that the UK would avoid recession but have the highest inflation rate of any member of the G20 group of leading nations apart from Turkey and Argentina, the chancellor said: “Today’s report boosts our growth forecast, praises our action to help parents back to work with a major expansion of free childcare and recognises our cuts to business taxes which aim to drive investment.
“But while inflation is still too high, we must stick relentlessly to our plan to halve it this year. That is the only long-term way to grow the economy and ease the cost of living pressures on families.”
Britain’s inflation rate was set to be higher than Germany’s 6.3% and France’s 6.1% and the OECD average of 6.6%, the projections showed.
In its overall assessment, the Paris-based OECD said ever-higher borrowing costs to combat rising price pressures could put the global financial system under severe stress and send share and bond prices tumbling as it expressed concern in its half-yearly update that the full impact of tougher policy was yet to be felt.
Helped by falling energy prices, the OECD said it now expected growth across its member states of 1.4% this year, up from 0.8% in its last economic outlook. Its UK growth forecast has been revised up from -0.4% to 0.3%.
“Global economic developments have begun to improve, but the upturn remains fragile,” the OECD said as it predicted that global growth would ease from 3.3% in 2022 to 2.7% in 2023 before rising slightly to 2.9% in 2024.
“One key concern is that inflation could continue to be more persistent than expected. Significant additional monetary policy tightening may then be required to lower inflation, raising the likelihood of abrupt asset repricing and risk reassessments in financial markets,” the OECD said in its economic outlook.
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The thinktank said a related issue was that the impact of past interest rate rises was difficult to gauge after a prolonged period when central banks had pegged official borrowing costs at historically low levels. In the UK, the Bank of England’s monetary policy committee has raised interest rates at each of its last 12 meetings, pushing them from 0.1% to 4.5%.
“While a cooling of overheated markets and moderation of credit growth are standard channels through which monetary policy normally takes effect, the impact on economic growth could be stronger than expected if tighter financial conditions were to trigger stress in the financial system and undermine financial stability,” the OECD said.
Clare Lombardelli, the body’s chief economist, said: “Monetary policymakers need to navigate a difficult road. Although headline inflation is declining thanks to lower energy prices, core inflation remains stubbornly high, more so than previously expected. Central banks need to maintain restrictive monetary policies until there are clear signs that underlying inflationary pressures are abating.”
Lombardelli said it was important inflation was “squeezed out of the system” and there were some signs that upward price pressures had started to abate. “There will need to be some more tightening in some countries but we are approaching the peak [in interest rates],” she said. “The financial system is a lot more robust than it was before the global financial crisis.”
The OECD chief economist said it was time for member countries to repair the damage to their public finances caused by the twin shocks of the past three years.
