Preventing entrenched inflation will require inflicting economic self-harm, IMF warns

Preventing inflation from spiralling out of control will require dealing a heavy blow to the UK’s economic health, the world’s economic watchdog warned today.

Getting inflation back down to the Bank of England’s two per cent target will come with the trade off of squeezing households’ living standards and choking economic growth, the International Monetary Fund (IMF) said today.

The cost of living is currently running at 5.5 per cent, its highest in nearly 30 years.

Inflation is expected to at least hit 7.25 per cent in April, according to the Bank, but some economists think it could top eight per cent.

“It may prove difficult to return to the inflation target without a period of compressed incomes and below-average growth,” the IMF warned in an annual report on the UK economy published today.

Brits are facing the worst drop in real living standards since the late 1940s, caused by a combination of price rises, tax hikes and higher energy bills.

Some economists have slashed their forecasts for economic growth this year caused by a slowdown in spending as a result of household budgets being pinched.

The UK inflation crunch has been mainly driven by global factors associated with a sudden surge in demand as countries emerged from Covid-19 restrictions rubbing up against supply bottlenecks.

However, “signs of second-round effects have been emerging” such as rising prices in the services sector, the IMF said.

Governor of the Bank Andrew Bailey today told MPs on the Treasury Select Committee workers need to rein in pay demands in a bid to prevent inflationary pressure being baked into the economy.

There is concern among Bank officials price rises could remain elevated if workers demand higher pay, leading firms to hike prices to protect margins and, in turn, triggering more wage demands.