A new session of Parliament will begin in a couple of weeks, with the Queen’s Speech on 10 May laying out the Government’s agenda for the year. MPs are likely to have plenty on their minds, perhaps especially when it comes to the economy. Prices are rising faster than at any time in the past thirty years, and sectors of the economy are being affected in different ways.
This Insight looks at some of the economic data published this month and discusses what it might mean for the near future.
The cost of living continues to rise
Annual inflation in the UK in March reached its highest level since 1992, at 7.0%. Prices have been rising across almost all sectors of the economy, but fuel and energy have been particularly noticeable: petrol prices rose by more in March 2022 than in any other month since records began in 1990, while the Ofgem energy price cap increased on 1 April by 54% compared to the previous cap.
Russia’s ongoing invasion of Ukraine continues to affect the wholesale cost of gas, which is expected to keep energy prices high for some time. Executives of energy companies told the House of Commons Business, Energy and Industrial Strategy Committee on 19 April they expect there will be increases in fuel poverty, particularly if the price cap rises again in October, and the effect could be “truly horrific”.
If last month’s forecasts from the Office for Budget Responsibility (OBR) turn out to be correct, inflation will continue to rise to over 8% by the end of the year, potentially to its highest level since the 1980s.
Economic loss of confidence may lead to low growth
The increases in the cost of living are likely to affect the rest of the economy, as household budgets are squeezed. There has already been some sign of this, with retail sales figures for March showing a 1.4% fall compared to February. However, there are even more worrying signs for the near future when it comes to measures of confidence: market research company GfK recorded a consumer confidence index of -38 in April. This index measures attitudes towards the economy overall and people’s personal financial situations, and is now at its lowest level since the height of the financial crisis in July 2008, as shown in the chart below. GfK also suggested further falls were on the horizon.
Measures of business confidence are not faring much better, with both demand and business optimism slowing in S&P Global’s most recent Purchasing Managers’ Index (PMI) data release (PDF). These warning signs have led independent forecasters to predict low economic growth in the first quarter of this year, and possibly even negative growth in the second quarter.
Although few if any economists think the UK is heading into a recession at the moment, the governor of the Bank of England said on 21 April that action to tackle inflation might risk causing one. The Bank’s Monetary Policy Committee raised interest rates for the third time in a row on 17 March in response to rising inflation, and may do so again at its next meeting on 5 May.
Incomes are not keeping up with prices
Most of the labour market’s headline figures continued to show slow improvement in April, according to the Office for National Statistics’s most recent data. As the chart below shows, the employment rate has still not returned to pre-pandemic levels, but the unemployment rate now has.
However, although wages have been continuing to increase (driven by high demand for workers and high levels of vacancies), they are some way off keeping pace with inflation. The OBR’s most recent forecasts suggest wages will fall this year in real terms, resulting in household disposable income also falling in real terms in both 2022 and 2023.
- Rising cost of living in the UK, Commons Library briefing
- Domestic energy prices, Commons Library briefing
- Economic Indicators, Commons Library briefing
About the author: Philip Brien is a researcher at the House of Commons Library, specialising in public spending.
Photo by Jan Antonin Kolar on Unsplash