Although the hit to households’ real incomes from a bigger surge in CPI inflation than most expect (to a peak of almost 7% in April) explains why we think GDP growth will be slower this year than the consensus forecast, we still think that the leap in inflation will prompt the Bank of England to raise interest rates further this year than most economists anticipate, from 0.25% to 1.25%. The risks are that the labour market remains stronger for longer, CPI inflation stays above the 2% target well into next year and the Bank of England raises interest rates further in 2023.
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