Global Economic Outlook – September 2022 UK: Economy marred by stagflation Inflation set to peak at The economy is probably A package of government 10.5% as government already in a mild recession, support measures to households policies limit the impact with growth expected to and businesses, and a reversal of energy price rises on stay negative for the rest of major tax increases, are set to households’ utility bills. of this year. provide a large fiscal boost. The UK outlook continues to be dominated by high levels Table 16: KPMG forecasts for the UK of inflation, which first reached double digits in July 2022 2021 2022 2023 at 10.1%, before easing to 9.9% in August. Supply chain disruptions, arising during the global recovery from the GDP 7. 4 3.2 -0.2 effects of the pandemic, caused the initial pick-up in inflation Inflation 2.6 8.9 5.6 in 2021. More recently, the main driver of higher inflation has come from higher energy prices, particularly for natural Unemployment rate 4.5 3.7 4.3 gas, and elevated food prices, both linked to Russia’s Source: ONS, KPMG forecasts. invasion of Ukraine. Note: Average % change on previous calendar year except for unemployment rate, which is average annual rate. Inflation measure used is the CPI and the unemployment measure is LFS. European and UK gas markets have been extremely volatile throughout the past 12 months as the threat of and the eventual interruption of supplies from Russia has put upward pressure on prices. By August this year, Chart 42: Outlook for UK inflation UK domestic energy bills have already risen by 73.2% 18% compared to a year ago. The UK Government’s decision Forecast to cap domestic energy bills at £2,500 from October 16% 2022 has limited further increases to 27%, avoiding the 14% expected series of sharp rises that could have seen bills 12% rise by another 235% by April 2023. We estimate that 10% these measures will have reduced headline rate of inflation by around 5 percentage points next year (see Chart 42). 8% This will help keep the peak of UK inflation at 10.5% in Annual CPI inflation6% October this year before it is expected to fall throughout the 4% following two years. 2% 0% In contrast to natural gas, the prices of other commodities, 2016 2017 2018 2019 2020 2021 2022 2023 2024 such as oil, metals and food fell back from peaks reached in the aftermath of Russia’s invasion in February. In August CPI inflation Forecast exc. energy price freeze Inflation target alone, the fall in global oil prices helped ease UK inflation Source: ONS, KPMG analysis. to 9.9%, as the prices of automotive fuels fell by 6.8% between July and August. This, in addition to a fall in global food prices which took place between May and July this year, and which is yet to feed into UK consumer prices, should help in bringing inflation down towards the Bank of England’s 2% target over the next 6 to 12 months. © 2022 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 45