Autumn Budget 2021: Cost of living headache as inflation to average 4% in new year

Businesses and consumers face inflation misery heading into the new year with the Consumer Prices Index (CPI) forecast to average an annual rate of 4 per cent over the course of 2022.

The Office for Budget Responsibility (OBR) revealed pain in store for household and public finances from rising inflation, with the latest prediction showing the rate CPI is set to jump from 3.1 per cent last month to an average of 4 per cent over 2022.

Many experts expect inflation to top 5 per cent in the coming months amid soaring energy costs and supply shortages.

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The inflation warning came as the OBR said it now believes the economy will return to its pre-Covid level at the "turn of the year", around six months earlier than predicted in March, as it delivered a raft of economic upgrades.

Households have been facing pressure from increased prices on many goods, while energy costs and petrol prices have also been on the rise. There are also tax rises round the corner. Picture: Rui Vieira/PA

Douglas Grant, director of Conister, part of Aim-listed Manx Financial Group, said: “If the OBR’s inflation forecast of 4 per cent over the next year materialises, this will lead to both raw material and labour cost rises which will have to be passed on to the consumer.

“Otherwise, this will have a negative impact on firms’ working capital, something which is already scarce due to disrupted supply chains and the Covid-19 pandemic. This could lead to an acceleration of the number of government debt-laden SMEs [small and medium-sized enterprises] seeking shelter through financial debt restructuring.”

With speculation mounting that the Bank of England may have to act soon to keep a lid on rocketing prices, the Chancellor warned that even a one percentage point increase in interest rates would cost the country £23 billion in payments on its debt mountain.

Ben Laidler, global markets strategist at multi-asset investment platform eToro, said: “A strongly recovering economy has allowed the government to begin to put the Covid crisis behind it and supports the corporate earnings rebound. But it also highlights the inflation pressures that will likely see the Bank of England the first of the biggest global central banks to raise interest rates as early as next week.”

Last week, the Office for National Statistics (ONS) said CPI eased to 3.1 per cent in September from 3.2 per cent in August.

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