National Institute UK Economic Outlook - Sailing in Treacherous Seas Spring 2022

J We forecast consumer price index inflation to average 7.8 per cent in 2022 and to peak at 8.3 per cent in the fourth quarter, remaining above the 3 per cent rate at which the Governor of the Bank of England and Chancellor of the Exchequer are required to exchange letters until, at least, the fourth quarter of 2023. [...] At the time of the Spring Statement in March, the fiscal position had improved relative to expectations, largely as a result of upward revisions to inflation, but – as is now widely accepted – the Chancellor of the Exchequer did not provide sufficient support to households, to the point that the government is reported to already be planning further interventions. [...] The prospect of further increases in energy prices heightens the dilemma facing members of the Bank of England’s Monetary Policy Committee (MPC), who need to weigh the risk of higher global commodity prices becoming engrained in domestic inflation against the risk of amplifying the impact of the squeeze on incomes. [...] The UK’s trade deficit narrowed towards the end of 2021… The UK ran a trade deficit of 1.0 per cent of GDP in the fourth quarter of 2021, less than the 2.8 per cent deficit in the third quarter. [...] This, together with an increase in gross earnings on direct investment paid to the UK by the rest of the world, contributed to a reduction in the UK’s net borrowing position with the rest of the world from 5.1 per cent of GDP in the third quarter of 2021 to 1.3 per cent of GDP in the fourth quarter.