UK risks ‘worst of all worlds’ on inflation, says IMF official

Bloomberg

Britain’s inflationary shock combines the worst of America’s problems with the worst of Europe’s and will be harder for policy makers to address than in any other leading industrialised nation, the head of the International Monetary Fund’s European department said.
Alfred Kammer, the IMF’s European director, said prices in the UK will remain elevated for longer than other G-7 countries because the economy faces both the tight labour market seen in the US and the energy crisis engulfing Europe.
The combination makes Britain unique among advanced nations and help explain the IMF’s gloomy forecasts for the nation.
“You could say that for policy makers this is worst of the two worlds to deal with,” Kammer told an online press conference from Washington.
The IMF forecasts UK inflation to average 7.4% this year, with only the US faring worse, and 5.3% in 2023. No other G-7 nation sees inflation above 3% next year. Britain’s cost of living crisis will also hit output, leaving the UK at bottom of the G-7’s GDP league table in 2023, according to the IMF. The forecasts for high inflation and weak growth amount to a short bout of stagflation, with Kammer warning that the UK is at risk of recession later this year.
Asked about quarter-by-quarter growth outlook for the UK, he said that “all major European economies except for Spain” will see “either zero or negative” growth over two consecutive quarters this year, and “there is a risk some of them could enter a mild technical recession.”
Bank of England Governor Andrew Bailey said rate-setters had to walk a difficult path between tackling inflation and potentially triggering a recession in the UK. The BOE has raised rates three times since December to 0.75% an is expected to increase them to 2.25% by end of year.
Bailey said the BOE is on a “tightening path,” and policy makers have to balance that against the “big negative force” being exerted by surging energy costs and inflation.
“You can walk down a narrow path, but there is a lot of uncertainty around it,” Bailey said in a panel discussion in Washington. “It’s very clear to me that at each meeting we are going to have to come back to this judgment and see how it develops”
Kammer said UK faced “energy shocks, supply chain disruption and demand-supply imbalances.” Prices will remain elevated in 2023 as “labour markets remain tight, leading to some wage catch-up and from companies seeking to preserve profit margins.”
“When you are looking at UK inflation, you see that this is a very difficult situation for policymakers to deal with,” Kammer said. “There are no easy ways to navigate this complexity.”
“What they are facing is the energy price shock from the euro area and at the same time they are dealing with at we are seeing the US — a tight labour market, demand pressures and pressure to increase wages.”