Boom or Bust? What the UK Economy Heads Are Trying to Say
While the Bank of England’s latest CPI number came in at a “pretty sweet 8.7%” for April, the market gurus at CMC Markets aren’t exactly dancing in joy. In fact, they’re predicting a reality check that might leave your bank account feeling a bit… bruised.
Three “Ouch!” Scenarios on the Horizon
- Stifling consumer squeezes – Imagine groceries costing an extra two pints for a pint of beer.
- Another Canada‑style rate hike – The base rate could climb, making mortgages and loans even more painful.
- Recession, UK‑style – A gloomy economic downturn that could force banks to tighten the screws on payday loans.
But hey, not all hope is lost! There’s a faint glimmer that the relentless chain of rate increases might just be about to hit a pause button.
Why the Baked Goods Are Still Expensive
Despite a softening trend in food inflation, May’s grocery numbers were a modest 17.2%, and the numbers from last month show a 0.1% dip – a hair‑line improvement that still lands at a staggering 19.1% year‑over‑year rise.
Michael Hewson, CMC’s top market measurer, summed it up so nicely: “We already know from the Kantar grocery numbers earlier this week that food inflation is slowing. In May, it came in at 17.2%, but the process is looking increasingly glacial.”
What This Means for Your Wallet
Bottom line: prices will keep creeping up, but just a touch slower. For the everyday consumer, the 0.5% bump left off the headline CPI could be a relief, but shelves will still look snatched. Take comfort in the fact that Bobs and Jills across the green‑belt strut a little lighter… or at least expect that extra coffee at a cafe to feel a tad pricier.
Three scenarios: 0.25% rate rise, further consumer squeeze or recession
Hewson’s Tough Call on the UK Economy
Bank of England chief‑economist Mike Hewson is laying out three grim futures for the UK over the next few months. He’s basically saying: “Get ready, folks – it’s about to get messy.” Below’s a quick rundown of the scenarios he sees coming.
Scenario 1: The Rate Hike Bonanza
- June rate rise. The base rate could jump by another 0.25%. That means higher mortgage rates and a tighter squeeze on household budgets.
Scenario 2: The “Let It Slip” Approach
- Keep rates steady. Leave the base rate where it is and let inflation finish its own slow dance. Consumers will continue battling sky‑high food prices—almost 20% more expensive than last year!
Scenario 3: The Recession Roadtrip
- Heading into a downturn. Much like Germany, the UK might find itself in a recession. “Two consecutive quarters of negative GDP” is the red flag. The fallout includes less spending from families and businesses, fewer loan cravings, and rising unemployment.
Hewson’s Dilemma
“Right now, we’re stuck in a tight spot.” He says. “We could do nothing, letting inflation steal more of anyone’s pocket. Or we could lift the rate by 25bps, giving the public a sign of activity. The last option is a hard shove into recession.”
Recent Forecasts vs. Reality
- In February, the Bank predicted a sharp –0.7% contraction for the end of 2023 (a slice of 2022). They thought a mini‑recession would be mild.
- Now the outlook has flipped: the economy might actually grow by 0.25%.
- Hewson raises a skeptical eyebrow: “They’re now predicting 0.2% growth for Q1 and Q2. Gave the 2023 GDP a boost from –0.3% to 0.25%, and even a 0.75% expansion for 2024. But remember, six months ago they forecast a two‑year downturn—so track record is shaky.”
Bottom line: The UK sits on a knife‑edge. Either it drags the economy into a recession or it braces for higher mortgage rates. Which way will the Bank take? No one knows for sure, but one thing’s clear—watch your wallet.
Bright light at the end of the tunnel
Bank of England Boosts Rates Yet Again
On May 11th, the Bank of England pushed the base rate higher for the 12th straight time, now sitting at a record 4.5%. It’s a milestone that signals the tightening cycle is almost behind us—but hold onto your lapels, because uncertainty still hangs around the corner.
What the Markets Are Saying
- Analysts reckon that rates could top out near 5.5%, a full 100 basis points above the current 4.5%—a nasty prospect for folks hunting mortgages.
- There’s still a wave of possibility: May’s CPI readings might surprise <—and that could shift the landscape before the June meeting.
Hope on the Horizon
CM
C Markets’ leading veteran, Hewson, thinks the surge might be winding down. He says there’s a “very real prospect that we’re reaching the end of the rate‑hiking spree, or at least very close to it.” If that holds true, the next few weeks could feel like a breath of fresh, less‑tight money.
Energy price cap’s trickle effect on inflation
UK Energy Landscape: Rethinking Inflation After the End of Price Caps
Hold onto your hats, because the UK government pulled the plug on two big energy support measures at the end of March: the price‑guarantee cap and a handy £400 bill‑cut scheme for every household with a domestic connection.
Cutting the Safety Nets
Without those safety nets, cheaper energy costs are no longer soaking into the headline inflation figure. That means the Consumer Price Index (CPI) could finally see the drop that the markets had been waiting for.
CPI and the Energy Puzzle
Bonding economist David Hewson explains the situation:
- “CPI numbers haven’t fully caught up with the recent dip in energy prices.”
- He added that “the effect was merely delayed, hanging around thanks to the government’s price cap.”
- Now that the cap is gone, that delay should disappear, letting the inflation data breathe a little easier.
Ofgem’s New Cap
On Thursday, Ofgem announced a new cap of £2,074 for annual energy bills starting July – a marked drop from the previous £3,280 ceiling that applied from April to June.
- With the two government schemes now offline, Ofgem’s update doesn’t change the bottom line much for consumers.
- Expect winter bills to stay roughly the same for households across the UK, no dramatic breakouts.
What’s Next?
- Watch the CPI figures—they’ll likely adjust as the new price dynamics settle.
- Keep an eye on others energy‑related policies; the market’s still shaking things up.
- Enjoy the humor in the situation: it’s like the government snipped the budget’s safety net and left us fending off the storm—cough!.
Stay tuned for real‑time updates on this topic as the energy scene continues to evolve.
