Chancellor Gives UK Inflation a Shot in the Arm and the Bank of England a Headache

The increased government spending would likely boost UK consumer confidence and shore up the economy going forward, however it creates a fresh inflationary headache for the Bank of England.

Image © Gov.uk

The UK inflation outlook was given a boost after the UK government announced up to 8 million households would receive a lump sum of £650.00 to stave off the 'cost of living crisis'.

In delivering an emergency mini budget Chancellor Rishi Sunaksaid "we cannot and must not allow short-term inflationary pressures to lead people to expect that high inflation will continue in the long term".

But minutes later he announced a £15BN spending boost, including a £5BN cash give-away to 8.4 million households on means-tested benefits.

The increased government spending would likely boost UK consumer confidence and shore up the economy going forward, however it creates a fresh inflationary headache for the Bank of England and suggests a refreshed impetus for higher interest rates.

In a question to the Chancellor, Treasury Committee Chair Mel Stride asked how much inflation would rise, noting these measures would stimulate the economy and raise inflation.

Sunak acknowledged it would stimulate inflation but he said the additional boost was "manageable".

"It will add to inflationary pressure and supports our view than the Bank of England will have to raise interest rates from 1.00% now to 3.00% next yea," says Paul Dales, Chief UK Economist at Capital Economics.

Above: One in five Britons now say they are struggling or unable to make ends meet.

More than 8 million people who receive means-tested benefits will get a £650 grant paid directly into their bank accounts to support them with rising costs.

The scale of the give away rises to £850 for pensioners and those classified as the most vulnerable will get £1200.

There will also be financial support for all households: the £200 earlier provided as a loan repaid over five years will become a gift or grant, and it will be doubled to £400.

It will be paid to all energy customers in the autumn.

The giveaways will partly be paid for by a new 25% levy which will be charged on the extraordinary profits that oil and gas companies are currently making.

The tax is expected to raise £5BN in revenue, however this is unlikely as the Chancellor also announced an investment incentive that means for every additional £1.00 invested by oil and gas companies a 91p tax rebate would be secured.

The government spending comes as a new YouGov survey reveals 1 in 5 British people say they're struggling or unable to make ends meet.

Those saying they can only just afford their costs and often struggle making ends meet rose 6 points from May to 17%.

Those saying they cannot afford costs and often have to go without essentials like food / heating rose 4 points to 5%.

When asked how their household financial situation changed in the last month the results were:

Worse: 50%
No change: 41%
Better: 4%

On how you expect your personal finances to be in 12 months from now:

Worse: 60%
No change: 21%
Better: 7%