Europe

Inflation red alert: IMF warns UK of ‘great uncertainty’ as price crisis spirals

Dominic Raab grilled by Nugent over 'worries' about inflation

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Consumers are already dealing with a cost of living crisis as the price of everything from gas to meat rises – often far higher than wages. And while the International Monetary Fund (IMF) is predicting the UK’s economy will grow by a whopping 6.8 percent this year – much of this boost is clawing back what was lost during the Covid pandemic.

It is also predicting five percent growth next year, 0.2 per cent higher than previously suggested by the organisation, despite signs of a slowdown over recent months.

This rosy picture comes despite the latest World Economic Outlook warning of “great uncertainty” about the economic situation.

It points to rising inflation potentially killing off any growth.

The body believes that Brexit Britain and the US are particularly vulnerable to a cycle of rising prices after both their governments handed out generous packages to keep their economies afloat.

The IMF report said that problems “could materialise if pandemic-induced supply-demand mismatches continue longer than expected”.

That would lead to “more sustained price pressures and rising inflation expectations”, forcing “faster-than-anticipated” rises in interest rates.

The warnings have led some economists to lobby the Bank of England to raise interest rates as early as November to combat spiralling inflation.

So far its Monetary Policy Committee – which sets the bank’s base rate – has unanimously rejected the idea.

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But rather than silencing the calls, clamour for action to be taken has only increased.

The IMF said: “Monetary policy will need to walk a fine line between tackling inflation and financial risks and supporting the economic recovery.

“We project, amid high uncertainty, that headline inflation will likely return to pre-pandemic levels by mid-2022 for the group of advanced economies and emerging and developing economies.

“There is, however, considerable heterogeneity across countries, with upside risks for some, such as the United States, the United Kingdom, and some emerging market and developing economies.”

Addressing the damage that inflation could cause, the IMF’s report said: “The aftershocks from the upheaval of 2020 and the prospect of renewed restrictions to slow virus transmission could translate into more persistent supply disruptions.

“Faced with continued rising demand, firms may increase prices and workers may bid up wages more broadly than has occurred so far.

“More generally, should households, businesses, and investors begin anticipating that price pressures from pent-up demand and the many factors outlined above will persist, there is a risk that medium-term inflation expectations could drift upward and lead to a self-fulfilling further rise in prices.”

There have also been calls for the European Central Bank to address the danger of inflation within the Eurozone.

But so far it has refused to act.

Its chief economist Philip Lane still considers the price increase for services to be weak and any increases are likely to be temporary.

Additional reporting by Monika Pallenberg

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