by tyler | May 30, 2023 | CNN, economy
Brits woke up to yet more grim news on inflation Tuesday, with new data showing prices in UK stores are rising at a record pace. It’s the latest sign of a seemingly intractable cost-of-living crisis that has Prime Minster Rishi Sunak considering drastic measures, including price controls, to keep inflation in check.
The cost of store items, known as shop price inflation, rose 9% through the year to May, a fresh high for an index that dates back to 2005, according to the British Retail Consortium. Food inflation dipped slightly to 15.4% in May, but that’s still the second-highest rate on record.
Lower energy and commodity costs helped reduce prices of some staples, including butter, milk, fruit and fish. But chocolate and coffee prices are rising as global commodity prices soar, British Retail Consortium CEO Helen Dickinson said.
The slight drop in food prices will give cold comfort to consumers, and piles the pressure on Sunak, who has promised to halve inflation this year as one of his five pledges to voters.
The British public “are still wincing when their total comes up at the checkout… a weekly shop that cost £100 last year is now clocking in at £115,” Laura Suter, head of personal finance at stockbroker AJ Bell wrote in a note.
Poor households are being hit the hardest because they spend more of their disposable income on food. More people are using food banks in the United Kingdom than ever before, eclipsing even the peak of the pandemic.
The Trussell Trust, the UK’s biggest food bank network, handed out close to 3 million emergency food parcels over the 12 months to March 2023 — a 37% increase on the previous year.
Even the Bank of England, tasked with keeping inflation at 2%, has been caught off guard by stubbornly high food prices, which seem to have barely responded to 12 successive interest rate hikes.
Food prices have contributed to keeping inflation “higher than we expected it to be,” Bank of England Governor Andrew Bailey told a Treasury committee hearing last week. “We have a lot to learn about operating monetary policy in a world of big shocks,” he admitted.
The United Kingdom’s inflation problem is now so dire that Sunak is considering asking retailers to cap the price of essential food items, in a throwback to the 1970s. Back then, governments in the United States and United Kingdom imposed wage and price controls to tame inflation, although the policies weren’t very effective at bringing inflation down and were later dropped.
Economists say that capping prices encourages companies to produce less of a product, while making it more attractive to consumers. Supply goes down, and demand goes up, with shortages being the inevitable result.
Price controls distort markets and should only be used “in extreme circumstances,” Neal Shearing, group chief economist at Capital Economics, wrote in a note Tuesday. “The current food price shock does not warrant such an intervention,” he added.
The Sunday Telegraph was first to report the government’s proposal, which was quickly rejected by retailers.
Andrew Opie, director of food and sustainability at the British Retail Consortium said controls would not make a “jot of difference” to high food prices, which are the result of soaring energy, transport and labor costs.
“As commodity prices drop, many of the costs keeping inflation high are now arising from the muddle of new regulation coming from government,” Opie added in a statement. These include tighter rules on recycling and full border controls on food imports from the European Union, due to be implemented by the end of this year.
According to a government spokesperson, any price caps would not be mandatory. “Any scheme to help bring down food prices for consumers would be voluntary and at retailers’ discretion,” the spokesperson said in a statement shared with CNN.
Sunak and Finance Minister Jeremy Hunt “have been meeting with the food sector to see what more can be done,” the spokesperson added.
For Sunak, the pressure is on — particularly ahead of a general election widely expected to be held next year. Inflation was hovering above 10% when he made the promise to halve it in January. It dropped back to 8.7% in April, still well above his target. The Bank of England expects it to fall to “around 5%” by the end of this year, leaving little margin for error.
According to Opie of the British Retail Consortium, the government should focus on “cutting red tape” rather than “recreating 1970s-style price controls.”
At the top of the list of burdensome regulations are those introduced as a result of the country’s exit from the European Union, which is its main source of food imports.
Brexit is responsible for about a third of UK food price inflation since 2019, according to researchers at the London School of Economics.
New regulatory checks and other border controls added nearly £7 billion ($8.7 billion) to Britain’s domestic grocery bill between December 2019 and March 2023, or £250 ($310) per household, economists at the LSE’s Centre for Economic Performance wrote in a recent paper.
Food prices rose by almost 25 percentage points over this period. “Our analysis suggests that in the absence of Brexit this figure would be 8 percentage points (30%) lower,” the researchers wrote.
Imports of meat and cheese from the European Union were now subject to high “non-tariff barriers.”
— Mark Thompson contributed reporting.
by tyler | May 25, 2023 | CNN, economy
In the latest sign of economic pessimism, Americans are growing increasingly concerned they won’t be able to retire comfortably, according to a Gallup survey shared first with CNN on Wednesday.
Just 43% of nonretired adults think they will have enough money to live comfortably when they retire, according to Gallup. That’s the lowest level for that metric since 2012.
Americans’ retirement confidence has been noticeably shaken in recent years. The percentage of adults expecting to live comfortably in retirement is down by five percentage points over the past year and ten percentage points since 2021.
Less affluent Americans are especially concerned.
A record-low 19% of lower-income adults expect to live comfortably, according to Gallup, which began tracking these measures in 2002. A record-high 88% express worry about having enough money to retire.
Gallup said the outlook of non-retirees tends to swing in tandem with the national economic climate.
Mohamed Younis, Gallup’s editor in chief, told CNN on Wednesday that the overall retirement numbers are “rather grim” and reflect lingering concerns about the high cost of living, the safety of money in bank accounts and the risk of a recession.
The high cost of living makes it harder for families to save for retirement.
“People are really feeling the pinch. Even as the rate of inflation has slowed down, people’s feel of the crunch of inflation hasn’t,” said Younis.
The Gallup poll, conducted from April 3 to April 25, finds that women are much more concerned about their retirement situation.
Just 36% of women expect to have enough money to retire comfortably, compared with 50% of men.
Younger Americans are more optimistic about their retirement outlook, with 54% of those aged 18 to 29 saying they expect to have enough money to live comfortably. But just 38% of those aged 30 to 49 say the same and 39% of those 50 to 64.
Americans’ views on retirement vary significantly based on their income levels.
While just 19% of nonretired adults expect to have enough money to retire comfortably, Gallup said 36% of middle-income adults do and 65% of upper-income adults.
What’s interesting is that while non-retirees are worried about their retirement prospects, those who are already retired are not.
Gallup found that 77% of retirees say they currently have enough money to live comfortably, a figure that’s unchanged from last year despite the rising cost of living. Gallup said retirees have always had quite high views on living comfortably (ranging between 71% and 83%) — higher than those who await retirement.
Questions about the financial health and future of Social Security could be part of the reason for that divide.
Gallup found that while 59% of retired adults say Social Security is a major source of their retirement income, just 34% of retirees expect it will be for them. Those awaiting retirement expect to be forced to rely more on 401(k), IRA and other retirement savings accounts.
The Gallup findings on retirement are just the latest that point to the gloomy mood among consumers as they grapple with inflation, high borrowing costs and recession warnings.
Consumer sentiment remains historically low, dropping to a six-month low in May, according to the University of Michigan.
A CNN poll released Tuesday found that 76% of adults describe the economy as in poor shape, up from 71% who felt that way in March.
A Gallup poll released earlier this month found that just 35% of adults have a “great deal” or “fair amount” of confidence in President Joe Biden to do or recommend the right thing for the economy. That nearly matches the low confidence rating for presidents — 34% for former President George W. Bush in 2008.
by tyler | May 25, 2023 | CNN, economy
As the clock ticks down toward an unprecedented US debt default, the world’s second- and third-biggest economies are watching in fear.
China and Japan are the largest foreign investors in American government debt. Together they own $2 trillion — more than a quarter — of the $7.6 trillion in US Treasury securities held by foreign countries.
Beijing started to ramp up buying of US Treasuries in 2000, when the United States effectively endorsed China’s entry into the World Trade Organization, triggering an export boom. That generated vast amounts of dollars for China and it needed a safe place to stash them.
US Treasury bonds are widely regarded as one of the safest investments on Earth, and China’s holdings of US government debt ballooned from $101 billion to peak at $1.3 trillion in 2013.
China was the largest foreign creditor to the United States for more than a decade. But an escalation of tensions with the Trump administration in 2019 saw Beijing pare back its holdings, and Japan surpassed China as the top creditor that year.
Tokyo now holds $1.1 trillion, to China’s $870 billion, and that heavy exposure means both countries are vulnerable to a potential crash in the value of US Treasuries if the doomsday scenario for Washington were to unfold.
“Japan and China’s large Treasury holdings could hurt them if the value of Treasuries plummets,” said Josh Lipsky and Phillip Meng, analysts from the Atlantic Council’s GeoEconomics Center.
The falling value of Treasuries would lead to a drop in Japan and China’s foreign reserves. That means they would have less money available to pay for essential imports, service their own foreign debts, or prop up their national currencies.
Nevertheless, the “real risk” comes from the global economic fallout and likely US recession that could follow from a default, they said.
“That is a serious concern for all countries but poses a particular risk to China’s fragile economic recovery,” Lipsky and Meng said.
After an initial burst in activity following the abrupt lifting of pandemic restrictions late last year, China’s economy is now sputtering as consumption, investments, and industrial output all show signs of slowing. Deflationary pressure has worsened as consumer prices barely moved during the past few months. Another major concern is the soaring unemployment rate for young people, which hit a record level of 20.4% in April.
Japan’s economy, meanwhile, is just showing signs of emerging from stagnation and deflation, which have haunted the country for decades.
Even if the US government runs out of money and extraordinary measures to pay all its bills — a scenario that Treasury Secretary Janet Yellen has said could happen as early as June 1 — the likelihood of a US default may still be low.
Some US lawmakers have proposed prioritizing the payment of interest on bonds to the biggest bondholders.
This would be done at the expense of other obligations, such as payment of government pensions and salaries to government employees, but would stave off major debt defaults to the likes of Japan and China, said Alex Capri, senior lecturer at NUS Business School.
And without a clear alternative, in response to rising market volatility investors could swap shorter term bonds for longer term debt. That could benefit China and Japan, because their holdings are concentrated in longer-term US Treasuries, according to Lipsky and Meng from the Atlantic Council.
That said, broader financial contagion and economic recession are a much bigger threat.
“A debt default in the US would mean a fall in US Treasury prices, a rise in interest rates, a fall in the value of the dollar, and increased volatility,” said Marcus Noland, executive vice president and director of studies at the Peterson Institute for International Economics.
“It would also likely be accompanied by a fall in the US stock market, increased stress on the US banking sector, and increased stress on the real estate sector.”
That could lead the interconnected global economy and financial markets to stumble, too.
China and Japan are dependent on the world’s biggest economy to support companies and jobs at home. The export sector is especially crucial to China, as other pillars of the economy — such as real estate — have faltered. Exports generate a fifth of China’s GDP and provide jobs for around 180 million people.
Despite rising geopolitical tension, the United States remains China’s single largest trading partner. It’s also the second largest for Japan. In 2022, US-China trade hit a record high of $691 billion. Japan’s exports to America increased by 10% in 2022.
“As the US economy slowed, the impact would be transmitted through trade, depressing Chinese exports to the US, for example, and contributing to a global slowdown,” said Noland.
Bank of Japan Governor Kazuo Ueda expressed concerns last Friday, warning that a US debt default would cause turmoil in various markets and have serious consequences for the global economy.
“The Bank of Japan will strive to maintain market stability based on its pledge to respond flexibly with an eye on economic, price and financial developments,” he told parliament, according to Reuters.
Beijing, so far, has been relatively quiet on the matter. The foreign ministry commented Tuesday that it hopes the United States will “adopt responsible fiscal and monetary policies” and “refrain from passing on risks” to the world.
Chinese state news agency Xinhua published a column earlier this month, highlighting the “symbiotic relationship” the countries have in the US bond market.
“If the United States defaults on its debt, it will not only discredit the United States, but also bring real financial losses to China,” it said.
There’s nothing much Tokyo or Beijing can do, other than wait and hope for the best.
Hastily dumping US debt would be “self-defeating,” Capri said, as it would significantly drive up the value of the Japanese yen or the Chinese yuan against the dollar, causing the cost of their exports to “go through the roof.”
In the longer term, some analysts say a potential US default could push China to accelerate its drive to create a global financial system that is less dependent on the dollar.
The Chinese government has already struck a series of deals with Russia, Saudi Arabia, Brazil, and France to increase the use of yuan in international trade and investment. A Russian lawmaker said last year the BRICS countries, namely China, Russia, India, Brazil, and South Africa, are exploring the creation of a common currency for cross-border trade.
“This will certainly serve as a catalyst for China to continue to push the internationalization of the yuan, and for Beijing to double down on its efforts to bring its trading partners into the newly announced ‘BRICs Currency’ initiative,” Capri said.
However, China faces some serious obstacles, such as controls it applies to how much money can flow in and out of its economy. Analysts say Beijing has shown little willingness to fully integrate with global financial markets.
“A serious push for de-dollarization would see … much more volatile yuan trading,” said Derek Scissors, senior fellow at the American Enterprise Institute.
Recent data from international payments system SWIFT showed that the yuan’s share of global trade financing was 4.5% in March, while the dollar accounted for 83.7%.
“There is still a long way to go before a credible alternative to the US dollar can emerge,” Lipsky and Meng said.
by tyler | May 24, 2023 | CNN, economy
Americans who are already trying to navigate persistently high inflation, soaring interest rates, banking turmoil and recession fears are now faced with trying to prepare for the “unthinkable:” a potential US debt default.
Earlier this month, Kimberly Dickerson called up her creditors, asking about contingency plans in the event that her Social Security Disability check doesn’t land in June.
“The only way I can say it is, it’s going to be catastrophic,” said Dickerson, 52, of Richmond, Virginia.
Debt ceiling negotiations are continuing on Capitol Hill as a deadline of default looms larger by the day. Average Americans are taking notice and trying their best to protect themselves and their livelihoods.
A cross-section of Americans told CNN they’re becoming increasingly worried not only about the threat of the US defaulting on some or all of its financial responsibilities but also the effects of any spending cuts made in negotiations.
Teri House of Kansas met with a financial adviser about whether she could bear the cost if her elderly mother’s federal assistance is interrupted, putting the Navy veteran’s established memory care services at risk.
Utahn Bob McGee, who usually keeps a steady hand on his investments, liquidated more than scheduled to hoard enough cash for six months’ worth of expenses.
Navy Griffin, a 2020 college graduate from Arkansas whose early career has been pockmarked by negative and historic economic developments, frets about another setback.
Teri House, of Wichita, is grateful for the consistency and quality of the memory care her 92-year-old mother has received for more than five years.
Her mother has long been a helper and someone who has cared for others, House said, noting that her mother is a Korean War veteran who went on to have a four-decade career as a public school teacher and later taught English and history to immigrants seeking their Green Cards.
But House fears her mother’s dedicated care and stability is being put at risk: Her Social Security, Medicare and teacher’s pension all go toward funding that care.
House, 66, said she’s grown increasingly scared about those federal funds not only being delayed but also potentially being at risk for cuts in negotiations.
“She served her country and her community,” House said. “Why can’t her country serve her?”
Meanwhile, just outside Detroit, veteran Christopher Land is nervous too. He said his family would immediately feel the impacts of a failed debt ceiling negotiation, and he’s concerned about what it would mean for his fellow residents in need.
“Our retirement savings were wiped out by medical debts years ago,” said Land, 41, whose wife is disabled. “A default could be really bad for us. I’m employed by a city government. We are on public assistance. We have loans. We’re living on the right side of the paycheck-to-paycheck line, but not by a lot.”
Land, a former automation engineer, left behind the steel-toed boots for a job at the library and volunteer advocacy work for people with disabilities and those with mental health needs.
“A ton of my work revolves around helping people in need and on the fringes,” he said. “Still, I find myself more worried about what negotiating on the debt ceiling yet again will do to all of us in the long run. We’ve all given up so much already.”
In Vancouver, Washington, Colette Hellyer and her family are in the throes of house hunting. They’re banking on a $9,000 refund due back from the Internal Revenue Service in June from self-employment tax payments.
“Unfortunately, what’s needed for a down payment continues to grow,” Hellyer said, referencing the climbing interest rates. “So the notion that we may not get that money, or who knows when we possibly could, is very disconcerting for sure.”
Hellyer said she’s contacted her representatives, both locally and nationally, to share her concerns for not only her family’s situation but also that of her parents — who rely on her father’s military retirement and Social Security.
Having grown up in Virginia, Bobby Hall said the proximity to Washington, DC, means he has lived through and witnessed how government shutdowns have rippled through the community, impacting not only federal employees but also the local businesses and organizations.
“I know this isn’t a government shutdown, but that’s the only thing I can really relate to,” he said. “Every time the government does things with the economy that stop federal funding going places, it has such as big trickle-down effect.”
And working for a nonprofit organization that relies on federal grants further adds to the worry.
The uncertainty makes it hard to prepare, said Hall, who depleted his savings during a recent move and a change of employment.
“What do you do when you have this government issue looming over you that you have no control over?” he asked. “I’m putting away a couple hundred dollars every paycheck, not really splurging on anything right now and trying to at least have some savings built up in case there’s some impact on nonprofits.
“But it’s not going to be enough,” he added. “It’s not going to be more than a month of expenses that I can save up that fast.”
Bob McGee considers himself a long-term investor and, typically, his course of action is to ride out turbulent times in the market.
“But every once in a while, there’s something going on that just makes me nervous,” said McGee, 60, of American Fork, Utah.
This time, he said, he worries “about the nonsense in Washington and their willingness to play Russian roulette with the investment market.”
Mostly retired, McGee taps his investments for living expenses and travel, and he was slated to liquidate some investments in late June. That timeline got accelerated and the amount amplified. He pulled aside enough funds to cover six months of living expenses.
“Hopefully this will be enough to weather most storms that might result from a, hopefully, temporary default,” he said.
In Tucson, Arizona, Alejandro Terrazas fears he may lose a chunk of his retirement savings and rainy day funds if the impasse continues.
“I’m getting up there in years, but I’m not ready to retire probably for 10 more years, and if it’s some temporary thing, I won’t make any moves,” said Terrazas, 60. “But most of my money in retirement is in the stock market, except for the house I own.”
He said he hopes the direct impact to him would be short term but also is concerned about what this means for his children.
“I’ve got three kids, aged 22, 24 and 27, and they’re just getting started, so this could be a bit of a blow to them — especially if there’s an overall recession and it’s not just about federal funding,” he said. “Contagion, that’s my worry.”
Those just starting out in their careers are feeling that anxiety, too.
Navy Griffin, 25, spent her formative years growing up under the poverty line and seeing her single mother endure challenging economic times like the Great Recession while raising two kids.
Griffin graduated college in 2020, a time when the pandemic had buckled the labor market. It took her six months of looking, but she eventually landed a job in the housing industry. But only 18 months later she lost that position, as the Federal Reserve’s inflation-fighting interest rate hikes stifled real estate activity.
Having moved back to Arkansas, Griffin now worries her job as a data analyst in clinical research — a position she landed after another six-month job search — may be negatively affected if federal funding is backlogged.
“I’m especially worried because there’s such a deadlock, and I just don’t think something’s going to happen,” she said. “I just have no confidence in the economy. I don’t think I ever really did, because of the [economic] environment I was raised in. But this has just been exponentially worse than I could have imagined.”
During the protracted congressional debt ceiling impasse of 2011 — a time when the US economy also was navigating a slow recovery and combating spillover effects from global events such as Europe’s sovereign debt crisis — financial markets were roiled, retirement assets tumbled, US debt was downgraded, borrowing costs rose, and consumer confidence sank.
“It was only over a longer period of time, where the political rancor really became noxious, that you saw the deterioration in corporate and consumer confidence and the sell-off in equity markets,” said Joe Brusuelas, principal and chief economist for RSM US. “So, because this has happened in a quick period of time, you haven’t had a chance for this to really spill over and permeate public consciousness.”
He added: “This should end, even with a last-minute solution, before it would cause real systemic issues in finance, the economy and amongst the public.”
Still, people’s concerns are legitimate, he said. Brusuelas estimates there’s a 70% probability that lawmakers reach an agreement, a 20% probability of a short-term extension, and a 10% chance that the United States defaults.
And those concerns do have real-world effects, said German Cubas, an associate professor of economics at the University of Houston.
“People form expectations, and their behavior responds to those expectations,” Cubas said. “There’s a lot of things going on in the economy, inflation for example, and now there’s more uncertainty regarding this debt ceiling.”
by tyler | May 24, 2023 | CNN, economy
Even though time is running out to get a debt ceiling deal through Congress, one of the key players that will decide the fate of America’s credit rating is convinced disaster will be averted.
“We absolutely don’t think there will be a scenario where we cross the X-date and interest payments will be missed,” William Foster, senior vice president and senior credit officer at Moody’s Investors Service, told CNN. “If we did, we would obviously have to change our view on the rating.”
Just eight days remain before the government could run out of cash (the so-called X-date), but Foster said Moody’s is “confident” the federal government will not suffer a first-ever default.
“If we were less confident, we would change our outlook to negative,” Foster said.
The coming days and weeks could test that confidence.
House Republicans and the White House are, so far, struggling to find a compromise on how to raise the debt ceiling. Cash levels at the US Treasury are dwindling and the accounting gimmicks officials are using to avoid default won’t last much longer.
Wall Street is even starting to wake up to the debt ceiling dangers ahead, with the stock market finally buckling a bit following days of calm.
Even if a default is avoided, there is a risk that America’s ability to borrow cheaply – a key strength of the US economy – will be diminished if Moody’s or another credit ratings firm downgrades the country’s credit rating. During the 2011 fight over the debt ceiling, S&P removed its perfect credit rating from the United States.
Asked why he is confident the United States won’t default, Foster pointed to historical precedent, adding, “There has never been a default.”
The Moody’s executive also reassuring comments from Republican and Democrat leaders alike about the importance of America paying its bills.
“The message is clear: Neither side intends to default,” Foster said. “We’re expecting the noise to be pretty loud but fundamentally the outcome to be the same.”
Asked if Republicans should be blamed if the United States defaults, House Speaker Kevin McCarthy questioned the premise. “First of all, I don’t think there will be a default,” McCarthy told reporters on Wednesday.
However, given the tight timetable between now and the June 1 deadline set by the Treasury Department, Moody’s isn’t ruling out the idea that the federal government could be forced to delay payments on other items beyond payments to bondholders.
“If you get past the X-date and Treasury can no longer pay all of its obligations, Treasury will need to prioritize payments in some way. Certain payments would be missed and others paid first,” Foster said.
Yet Foster made clear that delayed payments on things like Social Security checks or government salaries would not be considered by the credit ratings firm a default.
“Our definition of default is missed interest or payments on principal. If any other payment is missed, that is not a default by our definition,” said Foster.
Thankfully, there is a bit of time before the next interest payment is due on US debt on June 15.
Still, delayed payments to Social Security recipients or government employees and contractors would cause real economic pain and create vast uncertainty for families, business leaders and investors.
“We’ve never been there before. The X-date has never been crossed,” said Foster.
Treasury deciding to prioritize payments to bondholders would mean the United States is “one step closer to potential default,” Foster said.
If there’s no deal by the X-date, Foster indicated the most likely outcome is that Moody’s would lower its outlook on the United States from stable to negative but stop short of an actual downgrade.
Foster said he can’t definitively say how the process would play out because it would be decided by a committee of experts from around the world who would evaluate the situation. Changing the outlook would “certainly be under consideration,” he said, adding that there would be a discussion of a downgrade.
The red line is missing an interest payment.
In that situation, Foster said, Moody’s would “absolutely downgrade” America’s credit rating.
by tyler | May 23, 2023 | CNN, economy
The United Kingdom will not, after all, be the worst-performing rich economy this year, the International Monetary Fund (IMF) said Tuesday, announcing a major revision to its previous gloomy forecast.
The Washington-based organization said it now expects the UK economy to grow 0.4% in 2023, upgrading its April forecast by a whopping 0.7 percentage points.
The forecast reflected “higher-than-expected” resilience in demand helped by strong wage growth, improved confidence and falling energy prices, the IMF added.
While previously the IMF saw UK GDP contracting by 0.3% this year, it now predicts that Britain will grow ahead of Germany, which is expected to shrink by 0.1%, according to its April forecast. The United Kingdom will still lag Russia, France and Italy, all expected to grow by 0.7%.
The IMF cautioned, however, of “considerable” risks to the outlook for the UK economy.
“The major near- to medium-term risk is greater-than-anticipated persistence in price and wage setting, which would lead to higher inflation for longer,” it said, noting potential “headwinds to growth” from “policies needed to combat inflation,” such as interest rate hikes.
The IMF expects inflation to return to the Bank of England’s 2% target only by mid-2025 — six months later than in its April forecast. “Risks to this trajectory are tilted to the upside… rates may have to remain high for longer to bring down inflation more assuredly,” it added.
Data due on Wednesday is expected to show a sharp slowdown in UK inflation in April, driven in large part by falling energy prices.
The IMF cautioned, however, against “premature celebrations,” saying inflation could “plateau” at an elevated rate if wage and price pressures prove persistent.
The Bank of England hiked borrowing costs for the 12th consecutive time earlier this month, taking the main interest rate for commercial banks to 4.5%, the highest since 2008. It also warned of upside risks to inflation, stemming in part from labor shortages and strong wage growth, and said further rate hikes might be necessary to tame prices.
The annual rate of UK inflation eased to 10.1% in March, from 10.4% in February, but still remained far higher than in the United States and the European Union. Average wages are still lagging inflation but rose 6.6% in the three months to February 2023 compared with a year prior, according to official data.
The IMF’s improved outlook for the UK economy follows a similarly positive revision by the Bank of England earlier this month. The central bank now expects the economy to grow 0.25% this year, compared with a February forecast for a contraction of 0.5%.
The IMF projects UK GDP growth to accelerate to 1% in 2024, in line with its previous forecast.
