The Bank of England warns energy bills will hit £2,800 – as inflation hits 10%

The cost of living will hit a record high this year, the Bank of England warns, with inflation expected to hit 10% and energy bills and food prices likely to rise further

inflation will reach 10% this year, the Bank of England warned – and energy bills could be forced to a 40-year high.

The UK economy is expected to go into reverse gear, with skyrocketing energy costs expected to push up inflation, the Bank of England said today.

The bleak forecast came as the bank hiked interest rates from 0.7% to a 13-year high of 1%. Some of its benchmark rate setters voted for an immediate hike to 1.25%.

The bank now forecasts that average annual gas and electricity prices, which rose to £1,971 last month, will rise again to around £2,800 in October.

Coupled with a global surge in commodity prices, exacerbated by Russia’s war in Ukraine, the UK economy will suffer a setback in the last three months of this year, the bank predicts in its latest update.

Its monetary policy committee expects the economy to remain weak next year and could contract slightly.

The forecast for a dramatic slowdown raises fears that the economy will plunge into recession.

The MPC voted by six members to three to raise its base rate – which affects lenders’ fees – to 1%.

The three members voted for an increase to 1.25%.

It’s the first time the bank has voted to raise interest rates four times in a row in the MPC’s history, which dates back to 1997.

The rate is expected to continue rising and is expected to reach 2.5% by the middle of next year.

A string of rate hikes will be another blow to households already hit by a cost-of-living crisis.

While those with fixed-rate mortgages will be shielded for now, it will boost repayments for others at adjustable-rate deals, those taking on new home loans, and other forms of borrowing.

The bank now fears real household disposable income will fall by 1.75% this year, worse than forecast in February and the biggest fall since records began in 1964.

Households are expected to save less on this.

In its update, the MPC said: “Global inflationary pressures have sharply intensified following Russia’s invasion of Ukraine.

“This has resulted in a material deterioration in the outlook for global and UK growth.”

The committee expects CPI inflation, which hit a 30-year high of 7% in March, to have topped 9% last month.

It is then forecast to hit more than 10% in the final three months of this year, the highest since 1982, buoyed by what the MPC forecasts will mean a 40% rise in energy bills in October.

At that point, regulator Ofgem is next to raise a price cap that will affect 22 million UK households.

“Given how the price cap works, consumer price inflation in the UK is likely to peak later than in many other economies and therefore may fall back later,” the bank said.

However, she also predicted that inflation would fall to just over 2% – the bank’s target – in two years’ time.

It will then fall to as low as 1.3% in three years, he added.

Unemployment, which had fallen earlier, is expected to rise again towards the end of this year.

Average wage growth is forecast at around 4%.

World prices for oil, gas, food and other commodities have risen sharply since Russia invaded Ukraine.

The situation has been made worse by Covid-related lockdowns in China, as well as disruptions to supply chains.

Alice Haine, personal finance analyst at investment platform Bestinvest, said: “With headline inflation already at a three-decade high, it was unsurprising that the bank expected inflation to be just over 9% for the second quarter of this year and over 10% at its peak towards the end of the year – a reflection of higher energy prices after April’s sharp rise in the Ofgem price gap combined with October’s forecast rise.

“Meanwhile, the bank expects economic growth to slow dramatically to just 0.1% in the second quarter as rising food and energy costs and disruption to the fresh food supply chain put pressure on consumer spending, with the war in the Ukraine the cost crisis intensified even further. ”