Inflation WILL hit Britons hard this winter and families will be almost 2% worse off by 2023 while higher energy prices could become PERMANENT, Bank of England governor warns in gloomy forecast
Britons are already seeing inflation 'biting' into their household incomes and will continue to be hit hard this winter, the Bank of England governor said today - as forecasts suggested families will be almost two per cent worse off by 2023.
Andrew Bailey said he was 'very sorry' about the situation as he warned higher energy prices could become permanent due to the switch away from coal to tackle climate change.
'Inflation is clearly something that bites on people's household income. I'm sure they're already feeling that in terms of prices that are going up,' he told BBC Radio 4's Today programme.
'I'm very sorry that's happening. None of us want to see that happen.'
This graph shows how energy prices are projected by the Bank to account for a large part of the near‑term pickup in inflation
Wholesale oil and gas prices have risen substantially during 2021, as shown in this graph from the Bank
Mr Bailey predicted the cost of energy - particularly gas - was the main factor behind inflation and said prices could stay at a higher level due to the global switch to net zero.
'It is reasonable and necessary to think that we might transition from more polluting hydrocarbons to less polluting hydrocarbons until eventually let's hope we emerge in a much more complete renewable economy,' he said. 'So it is possible that some of what we've seen with gas prices is already climate change having effect if there's a switch out of coal.
'Then part of it would be permanent higher prices, not higher inflation but a level change in prices.'
The cost of gas has risen by as much as 400% in the past year.
The Banks Monetary Policy Committee released forecasts about the estimated hit to household wealth that will come from rising inflation and taxes.
It suggested that the bulk of the hit in 2023 would come from tax rises as average weekly earnings keep pace with inflation.
The gloomy forecast suggested the Bank does not believe energy prices will fall soon.
Mr Bailey's comments coincided with new data which showed the average UK house price hit a record high of £270,027 in October.
The average property value grew by 0.9% in October - showing an increase of more than £2,500 during the month, Halifax said.
Yesterday, the Bank of England's latest Monetary Policy Committee report said inflation as judged by the Consumer Price Index has already 'risen markedly' to more than 3 per cent amid supply chain 'bottlenecks' and soaring energy prices.
The MPC believes inflation will still be 'a little' above its 2 per cent target in two years' time - although it should dip lower after that.
The Bank shocked the markets by holding off on raising interest rates, but at a press conference governor Mr Bailey made clear that that will happen in the coming months.
He pointed to 'near-term uncertainties' over the prospects for the economy, highlighting the impact of the furlough scheme ending and energy prices as two grey areas.
The Bank struck a considerably gloomier tone on UK plc's prospects than before, downgrading growth estimates for this year to 7 per cent from 7.25 per cent, and from 6 per cent to 5 per cent next year.
Sterling slumped by almost a cent against the US dollar and the euro, and British government bond prices leapt as investors were wrong-footed by the Bank's announcement.
It delayed a rate rise despite warning gas and electricity tariff increases will see the Consumer Prices Index (CPI) leap from 3.1 per cent to 4.5 per cent by November and hit around 5% next April – its highest inflation forecast for a decade. 
The Bank also released this graph showing its gross domestic product projection based on market interest rate expectations
The Bank of England produced this graph showing its CPI inflation projection based on market interest rate expectations
The Bank said: 'The committee judged that… it would be necessary over coming months to increase Bank rate in order to return CPI inflation substantially to the 2 per cent target.'
The minutes showed the Bank held its nerve on rates as most members wanted confirmation first from upcoming official figures that unemployment has not jumped markedly higher following the end of furlough support.
The MPC also chose to hold the Bank's quantitative easing programme at £895billion, but the vote was split 6-3.
It said most MPC members believed there was 'value in waiting for additional information on near-term developments in the labour market… before deciding when a tightening in monetary policy might be warranted'.
Policymakers were also concerned over signs the UK economy is flagging as supply chain woes hold back growth, with consumer spending also proving more muted than expected.
The Bank slashed its growth forecast for the third quarter to 1.5 per cent from 2.1 per cent predicted in September. This would mark a steep drop from the 5.5% growth notched up between April and June.
It forecast growth would ease back further to 1 per cent in the fourth quarter, leaving overall gross domestic product (GDP) growth at 7 per cent in 2021 against the 7.25% predicted in August.
The report shows it now expects the UK economy to return to its pre-Covid level by the first quarter of 2022, against a previous prediction for a recovery by the year end.
'Growth is somewhat restrained by disruption in supply chains,' the Bank said.
'Alongside the rapid pace at which global demand for goods has risen, this has led to supply bottlenecks in certain sectors. There has also been some signs of weaker UK consumption demand.'
Chancellor Rishi Sunak (pictured) has said the government is vigilant on the threat of inflation getting out of control
The Bank said growth was set to be 'relatively subdued' from mid-2022 onwards as it downgraded its GDP outlook to 5% in 2022 from 6%, but kept it unchanged at 1.5% for 2023.
While the report showed rate hikes were likely on the way, the Bank's forecasts suggested more muted increases than expected in financial markets.
It predicts that inflation would undershoot its 2 per cent target in three years' time if rates rose to around 1 per cent by the end of 2022, as markets are pencilling in.
The report outlines a gloomy eight months for households from rising prices, but it stuck by its outlook that the inflation spike will remain 'transient' and will 'fall back materially from the second half of next year'.
Supply chain problems that have been impacting a raft of sectors since the early summer are set to last until the end of next year – longer than the Bank first expected.
But that too is set to fade from the end of 2022.
It came as new data showed house prices are continuing to rise in the UK.
Nationwide said that the average UK house price had hit a new record for its index of £250,311.
Andrew Bailey (seen yesterday) said he was 'very sorry' about rising inflation, which would 'bite into' household incomes
Wales remains the strongest performer across the UK, with annual house price inflation of 12.9%, according to Halifax's index.
Russell Galley, managing director of Halifax, said: 'With prices rising for a fourth straight month, the annual rate of inflation now sits at 8.1%, its highest level since June.
'One of the key drivers of activity in the housing market over the past 18 months has been the race for space, with buyers seeking larger properties, often further from urban centres.
'Combined with temporary measures such as the cut to stamp duty, this has helped push the average property price up to an all-time high of £270,027.
'Since April 2020, the first full month of lockdown, the value of the average property has soared by £31,516 (13.2%).'
He said that first-time buyers, supported by parental deposits, have improved mortgage access and low borrowing costs have also helped to drive price growth in recent months.
Mr Bailey said: 'It is possible that some of what we've seen with gas prices is already climate change having effect if there's a switch out of coal'
Mr Galley said: 'First-time buyer annual house price inflation (9.2%) is now at a five-month high, and has pushed ahead of the equivalent measure for home movers (8.1%).
'More generally the performance of the economy continues to provide a benign backdrop to housing market activity. The labour market has outperformed expectations through to the end of furlough, with the number of vacancies high and rising relative to the numbers of unemployed.
'With the Bank of England expected to react to building inflation risks by raising rates as soon as next month, and further such rises predicted over the next 12 months, we do expect house buying demand to cool in the months ahead as borrowing costs increase.
'That said, borrowing costs will still be low by historical standards, and raising a deposit is likely to remain the primary obstacle for many. The impact on property prices may also be tempered by the continued limited supply of properties available on the market.'
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