Could the Bank of England’s cure for inflation lead to a massive recession in the UK?

The UK recession indicators are not yet flashing red, but another surprise jump in consumer inflation in March will add to fears that economic growth will stall in the second half of the year.

Last month’s 7 percent inflation reading was the sixth time in a row that consumer price growth has exceeded market forecasts. Attitudes will get worse before they get better.

Economists expect the UK CPI to rise above 8 per cent in April once the off-game power cap that was kicked off this month rises to 54 per cent. This time last year, inflation stood at 0.7 percent, the fastest acceleration in price growth in 12 months since the start of the comparative record.

This spiral of inflation has historically led central banks to raise interest rates to tighten lending conditions, slow down usage and put a brake on growth. The most notable example is the 1980s “volcanism” in the United States – the nickname era of Federal Reserve Chairman Paul Volker, who created a recession in controlling runaway inflation due to the oil crisis of the 1970s.

This time around, central bankers think they can keep a lid on inflation while hiring a soft economic landing engineer to avoid a repeat of past mistakes. The Bank of England indicated last month that only a “moderate austerity in monetary policy” was needed in the coming months – a ruling that could be amended, subject to new economic forecasts presented in early May.

The bank’s new estimates show a further deterioration in the outlook for inflation compared to its latest figures from February before the start of the war in Ukraine. The economic forecast, however, remains a dangerous time-sensitive task. The direction of the Russia-Ukraine conflict is the most important factor in predicting how long supply-side shocks from higher oil, natural gas, food, commodity and fertilizer prices will continue. Rate-setters are unlikely to have any more privileged insights into Vladimir Putin’s intentions than the rest of us.

The outlook for global inflation will take a big hit if the European Union resolves its differences and imposes a full-scale embargo on Russian energy imports. Such a move would almost certainly push the EU into recession – and help pull the UK along. A recession is defined as two consecutive quarters of economic contraction.

For now, forecasters expect a significant downturn in the UK economy, but not a technical downturn following the expected return from the epidemic earlier this year. Goldman Sachs estimates that the energy crisis will hit 1.5 percent growth in Germany this year, and 1.1 percent in Italy, a more common 0.1 percent with the United Kingdom.

Sanjay Raja, UK economist at Deutsche Bank, expects UK GDP to grow by 3.8 per cent this year but “the economy will remain largely stagnant for the next two quarters”.

For Morgan Stanley’s Seth Carpenter, this “hiking cycle is one of the first since the 1970s where the goal was to reduce rather than prevent inflation. A policy error that caused the recession is clearly possible.”

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