UK cost of living squeeze looms as Bank of England meets – business live

The Bank of England will be more worried about the impact on the economy from the gas prices crisis, rather than on inflation, says Tom Pugh, UK economist at accountancy firm RSM.

Pugh warns that surging prices will hit companies, while looming tax increases and steeper energy bills will leave consumers with less money to spend.

So he thinks the Bank’s policymakers will focus on the underlying economy, for three reasons:

First, the disruption to some energy-intensive industries, such as fertilizer and steel manufacturers, and the knock-on effect to other industries will weigh on the economic recovery. The manufacturing sector is already struggling with labour and material shortages. Output was flat in July and is still 2.4% below its pre-crisis level, so further disruptions could easily cause activity to slip again.

Second, most households already face a 1.25% tax rise in April next year, when the new Health and Social Care Levy kicks in. This could knock between 0.5% and 1.0% off consumer spending, although its impact on GDP will be offset by a boost in government spending. The rise in energy bills could dent consumer spending further, dampening demand for goods and services in the real economy. UK households and businesses spent about GBP55bn on gas and electricity in 2020.

Based on the moves in wholesale prices, Ofgem may increase the utility cap by 20% in April 2022. If consumers respond to this price increase as they would to a tax rise, it could reduce real GDP by about 0.3% over a year.

Third, core inflation, which excludes food, fuel and energy prices and is the MPC’s preferred measure of underlying inflation, will still fall back quickly next year as the pandemic-related drivers of the current spike drop out of the annual comparison.

Ouch. Growth across companies in the eurozone is slowing, as supply chain problems, rising prices and Covid-19 continue to bite.

Data firm IHS Markit reports that eurozone business activity grew at a markedly reduced rate in September, as price pressures intensify.

Manufacturers blamed supply chain bottlenecks, while service sector firms said the ongoing pandemic hit demand, particularly for service sector exports.

Business expectations for the coming year were also knocked by rising worries over the impact of the Delta variant on demand and supply chains.

Jobs growth slowed, and firms’ costs jumped at the fastest rate in 21 years — adding to inflation pressures.

This all pulled Markit’s eurozone PMI, which measures activity, down to a five-month low of 56.1 in September, from 59.0 in August (anything over 50 shows growth).

Chris Williamson, chief business economist at IHS Markit says the eurozone faces an unwelcome combination of sharply slower economic growth and steeply rising prices.

Dame Clare Moriarty, chief executive of Citizens Advice, has warned that poorer households face a ‘perfect storm’ this winter – and that households whose energy supplier have collapsed probably face higher bills.

People whose energy supplier has collapsed should stay calm, she says. They won’t lose their gas and electricity, and will be transferred by Ofgem to a new supplier. That can take a few weeks so sit tight, she told the Today Programme.

But she warns that customers whose energy firm has collapsed could be hit with higher bills when they are switched.

Credit balances will transfer, as will any money owed to a supplier, Moriarty explains.

Q: So if you’re on a deal you were encouraged to find – that deal can now be torn up?

Dame Moriarty agrees that it is a “really, really worrying time for people”.

Citizens Advice are very conscious just how much people’s finances are being squeezed, she explains – particularly people on the lowest incomes who are facing a ‘perfect storm’.

That storm come from a combination of energy price increases, the end of the furlough scheme and the likelihood of more redundancies, and “critically” the end of the GBP20 per week uplift in Universal Credit.

Citizens Advice are also seeing an increase in people seeking information and advice on energy suppliers, and also seeking help coping with the cost of living squeeze.

Dame Moriarty explains:

Fears of shortages in the shops this Christmas, from the lack of lorry drivers, are also rising today.

ITV News explains:

More here: Tesco, Amazon and McDonald’s warn of Christmas disruption due to HGV driver crisis

Britain’s “Bang crash wallop” of economic trouble means the Bank of England is likely to continue to play a waiting game on interest rates.

So says Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Britain’s cost of living crunch will give the Bank of England much to ponder today as the central bank meets to set interest rates.

Yesterday two energy companies failed, affecting another 800,000 households, as ministers admitted they were considering a windfall tax on companies profiting from record gas prices.

Avro Energy, with 580,000 household customers, became the biggest energy supplier to fail and Green, which has 255,000 customers, also ceased trading – meaning more households will face higher energy bills within weeks.

Around 1.5 million households now face being transferred to new suppliers — probably on a higher tariff, meaning they could face paying hundreds of pounds more for their gas and electricity per year.

As we report this morning:

Green’s chief executive, Peter McGirr, told the Guardian there would be a “tsunami of more [collapses] to come” because small suppliers do not have deep enough pockets to weather the surge in costs without passing them on to their customers.

McGirr explained:

He added that the crisis talks held last weekend by the business secretary, Kwasi Kwarteng, had failed to include the smaller suppliers that are most vulnerable to the energy market shock and said his company’s calls for help from the industry regulator had “fallen on deaf ears”.

So this all gives the Bank of England a headache, as policymakers consider whether to continue with its QE stimulus programme, and when it might need to raise interest rates to calm inflation.

Inflation soared over the Bank’s target last month, to 3.2%, and is expected to keep climbing.

While surging energy prices will push inflation up, the squeeze on household budgets means a rise in borrowing costs would be painful.

Rising prices in the shops, the imminent GBP20/week cut to Universal Credit, and the end of the furlough scheme next week means many families face a cost of living crisis this winter.

New estimates from the Joseph Rowntree Foundation, seen by the Guardian this week, found a typical low-income UK family will be GBP1,750 worse off by April 2022 as factors combine into a spiralling cost of living crisis.

Guardian graphic. Source: Joseph Rowntree Foundation. Note: case study based on a family of two parents with two children where one adult is working full-time for GBP20,000 and they claim universal credit

So the BoE is expected to leave borrowing costs at record lows at noon today – while the minutes of the meeting will show whether its Monetary Policy Committee is concerned about the economic situation.

Deutsche Bank analysts expect ‘no change’ today, but they also expect the BoE to reaffirm that some tightening will be needed over the next few years to keep inflation in check.

Yesterday, the BoE’s counterparts in America said they could start ‘tapering’ their stimulus programme soon, and end the bond-buying programme up by next summer.

The Federal Reserve left interest rates unchanged at near zero after its latest meeting. Rates were cut in March 2020 as the US economy reeled from the impact of the pandemic. But the Fed also indicated it may soon start pulling back on the $120bn in monthly asset purchases program that it started when the coronavirus hit the US.

“If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the Fed’s post-meeting statement said

Also coming up today…

New surveys of UK, eurozone and US companies will show how the energy price squeeze, commodity shortages and record vacancies are hitting firms.

Investors are also watching the Evergrande crisis, as the Chinese property developer faces a key debt interest payment due today. Yesterday it struck a deal over another debt, on a domestic bond, which has reassured markets somewhat – with stock markets expected to rise.

The agenda

9am BST: Eurozone ‘flash’ purchasing managers survey for September
9.30am BST: UK ‘flash’ purchasing managers survey for September
12pm: Bank of England interest rate decision, and MPC minutes
1.30pm BST: US weekly jobless claims figures
2.45pm BST: US ‘flash’ purchasing managers survey for September