Inflation forecast: will it rise or fall in 2023?

Following a year that saw UK inflation climb to a 40-year high, consumers will be hoping that 2023 brings some relief. 

The hike in the rate of price increases over the past 12 months is largely down to “an increase in demand after the pandemic, supply chain delays, Brexit regulations, the war in Ukraine, and surging gas prices”, said The Times’s Money Mentor. 

 Inflation reached 10.7% in November, down from 11.1% in October, but still significantly above the Bank of England’s 2% target Inflation rate. 

Why the inflation rate matters 

As inflation rises, the purchasing power of money falls. So if the inflation rate over the next year is 10%, by the end of 2023 you’ll have to spend £110 to buy what £100 would get you now. “Another way of looking at it is that your original £100 is ‘worth’ 10% less than it was a year ago,” said Forbes. 

Inflation “in moderation” is a sign of a healthy economy, said Moneyfacts, as it combats the effects of deflation, which is often worse for an economy.

But if inflation becomes too high, “consumers will become poorer, limiting their disposable income and spending on non-essential items like holidays and nights out”, the comparison website explained. 

High inflation can also be a “disaster for your savings”, said The Money Edit. To grow your savings in real terms, you need to find a return above the rate of inflation, and “these simply don’t exist right now”. 

Inflation also erodes the value of any wage increases and ultimately, your pay packet. Latest Office for National Statistics (ONS) figures show that average private sector pay rose 6.1% between August and October. But in real terms, once adjusted for inflation, pay fell by 2.7% during that period. 

Can inflation be controlled? 

The government can’t prevent the prices of most goods and services from rising, but is providing an energy price guarantee that limits gas and electricity bills in order to help struggling households. 

The Bank of England is trying to combat soaring inflation by raising interest rates. Putting up interest rates makes borrowing for loans and mortgages more expensive and may encourage saving. Plus “if people have less money to spend, they are likely to buy fewer things, reducing the demand for goods and slowing price rises”, said the BBC. 

Article source: https://www.theweek.co.uk/business/personal-finance/958989/inflation-forecast-will-it-go-up-or-down-in-2023