Britain is facing the risk of stagflation after the Bank of England warned that surging energy prices will drive inflation to 10% by the end of the year as the economy stumbles. The pound plunged to its lowest since June 2020 as the BoE hiked borrowing costs to a 13-year high. Sterling has lost 2.5% in one day, down 2%, on track for the worst day since March 2020. The BoE predicted that the economy could contract sharply in the last quarter of this year when the energy price cap is lifted, as the cost-of-living crisis hit household spending. The UK economy is also expected to shrink in 2023. Although it might not be a technical recession, Bank of England governor Andrew Bailey agreed that the UK faces a ‘very sharp slowdown’. Experts agreed that the UK was on the brink of a recession, and that stagnation worries were rising. Just as in the 1970s, the Bank says external factors are mainly to blame. In 1973, it was the Yom Kippur war that led to 25% inflation by mid-1975. This time it is the war in Ukraine. The Bank is pencilling in another 40% increase in the energy price cap in October, taking the average annual household bill to £2,800. There may be arguments about whether the UK is technically heading for recession because the Bank is not forecasting two consecutive quarters of falling output – but it will certainly feel like it. Living standards are about to take their biggest hit in decades. In another echo of yesteryear, sterling took a dive on the currency markets after the Bank’s interest-rate decision.

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