A US think tank says that persistent inflation is one of the things that will hurt growth chances.
The British economy will shrink in 2023 and 2024, according to a study from the Peterson Institute for International Economics (PIIE) in Washington, which The Guardian revealed on Wednesday.
According to the study, the country’s gross domestic product (GDP) will fall by 0.3% this year and another 0.2% next year because of high inflation, falling real incomes for low-income households, and a lack of workers.
“The UK will not be in a recession all of next year, but the recovery will be slowed by higher-than-expected inflation,” PIIE president Adam Posen told The Guardian in response to the study. “As a result, the Bank of England will have to keep interest rates higher for longer.”
Posen, who used to work for the Bank of England’s monetary policy committee, said that the effects of Brexit are still hurting the UK economy and planned cuts to government spending next year will probably make things worse.
Last week was the first time in almost two years that the central bank did not raise interest rates because inflation dropped to 6.7% in August, which was a surprise because food prices grew less quickly, and the costs of lodging and air travel went down. But the UK still has the highest inflation of the G7 countries.
Posen said there could be more rate hikes in the next few months if inflation does not slow. Karen Dynan, who also wrote the study and was a co-author, agreed with the institute’s warning and said it does not just apply to the UK.
“Inflation seems to be going down in most countries, but it is still well above what central banks want it to be.” Because of this, most central banks will have to keep their policy rates high over the next year. She said this would make it hard for people to buy things and slow down the economy.