The UK is set to fall into its longest recession since the financial crisis and inflation will peak at more than 13 per cent as gas prices soar, the Bank of England has warned in a doomsday forecast.
Decision makers hiked the Bank's base interest rate to 1.75 per cent from 1.25 per cent, the biggest single rise since 1995, as they tried to control the runaway inflation.
Consumer Prices Index inflation will hit 13.3 per cent in October, the highest for more than 42 years, if regulator Ofgem hikes the price cap on energy bills to around £3,450, the Bank's forecasters said.
The energy price will push the economy into a five-quarter recession - with gross domestic product (GDP) shrinking each quarter in 2023.
"Growth thereafter is very weak by historical standards," the Bank said on Thursday.
The dire economic conditions will see real household incomes drop for two years in a row, the first time this has happened since records began in the 1960s.
They will drop by 1.5 per cent this year and 2.25 per cent next.
However, the recession will at least be shallower than the 2008 crash, with GDP dropping up to 2.1 per cent from its highest point.
Bank officials said that the depth of the drop is more comparable to the recession in the early 1990s.
Unemployment will start to rise again next year, according to the projections.
The Bank said that it expects inflation to come back under control in 2023, dropping below 2 per cent towards the end of the year.
"The United Kingdom is now projected to enter recession from the fourth quarter of this year," the Bank's Monetary Policy Committee (MPC) said.
"Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative."
GDP is set to grow by 3.5% this year, the Bank said, revising its previous 3.75 per cent projection downwards. It will then contract 1.5 per cent next year, and a further 0.25 per cent in 2024.
Meanwhile, real post-tax household income will fall 1.5% this year and 2.25 per cent next, it said.
All but one member of the MPC, which sets interest rates, voted for the base rate to rise by 0.5 percentage points to 1.75 per cent.
It puts rates at their highest point since January 2009.
The MPC said that pressures from inflation had intensified since the last time the committee met, largely due to a near doubling in wholesale gas price since May.
As this feeds through to energy prices, households will face a major squeeze on their budgets.
The Bank forecast that the price cap on energy bills will rise from £1,971 to £3,450 per year for the average household this October.
Experts from Cornwall Insight, an energy consultancy, have also predicted further hikes, to £3,616 in January and £3,729 in April. Other energy experts believe it could go higher still.
Long recession warning
The UK will enter five consecutive quarters of recession with gross domestic product (GDP) falling as much as 2.1 per cent, the Bank said.
Lasting over months or even years, a recession is a period of time where the economy declines.
A country is determined as being in a recession when it has a contracting economy over two consecutive financial quarters, often indicated through a negative gross domestic product, or GDP.
It is usually matched with increased unemployment and drops in the sale of retail goods.
Recessions are considered to be a natural part of the cycle of business but despite this, it is a period where the economy is undoubtedly struggling and, as a result, people struggle too.
They are usually caused by sudden economic shock, or as a result of inflation that has gone uncontrolled.
Interest rate hike
The central bank has increased its base rate from 1.25 per cent to 1.75 per cent - a rise of 0.5 percentage points.
It is the sixth time in a row that the BoE has hiked interest rates - and marks the largest increase in 27 years.
It also takes UK rates to the highest level since the end of 2008.
The base rate is what the central bank charges other banks and lenders - this in turn then influences the rates they charge customers.
If interest rates are higher, you'll pay more to borrow on products like mortgages.
But it should in theory be good news for savers, as banks should pay out more on your savings.
The BoE is raising interest rates to try and cool soaring inflation, which is currently at a 40-year high of 9.4% and is expected to keep rising.
The theory being raising interest rates, is that households will spend less and this should mean inflation will drop.
Soaring inflation
The BoE predicts inflation could hit 13.3% in October - it has a target of 2 per cent inflation.
High inflation affects how much you spend in shops, the power of your savings and your private pension.
When inflation rises, it means that your money doesn’t go as far as it used to.
For example, if something cost £1 a year ago and the rate of inflation is 9.4 per cent, it would cost £1.094 today.
Inflation has now risen for nine straight months.
The Bank said: "Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC's previous meeting.
"That largely reflects a near-doubling in wholesale gas prices since May, owing to Russia's restriction of gas supplies to Europe and the risk of further curbs.
"As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term.
"CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead."
