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Goldman Economist Sees Inflation Hitting U.K. Harder Than Europe

© Bloomberg. A shopper browses the window of a clothing store in Glasgow, U.K.

(Bloomberg) —

Inflation will hit the real incomes of people in the U.K. harder than those in continental Europe, according to an economist at Goldman Sachs Group Inc.

While sanctions against Russia will hurt Europe’s economy more, the impact of rising prices on spending power probably will be “more stark” because of the way energy bills are regulated, said Steffan Ball, chief U.K. economist for the investment bank. Consumer bills for electricity and natural gas will rise 54% on average this month after authorities lifted a cap on what utilities can charge.

While newspapers report the poorest households may have to choose between “eating and heating” later this year, those on middle and upper middle income probably can rely on savings accumulated during the pandemic, Ball said.

The remarks, made before data showed U.K. inflation surged to a 30-year high of 7% in March, indicate the scale of pressure on policy makers at the Treasury and Bank of England, which are struggling to contain a record squeeze on consumer spending power. The BOE has raised interest rates three times since December and may move again next month.

“They can buffer a shock to their real disposable income and not let it hit their living standards,” Ball said, referring to the more wealthy households. 

The question economists are asking is whether people will want to hoard cash and continue saving money, he said, adding, “It’s hard to think that they won’t be going out to restaurants and things like that.” 

There’s a “clear risk” that Britain will tumble into recession as the surge in inflation curtails household spending, Ball said, noting that a contraction isn’t Goldman’s central forecast.

©2022 Bloomberg L.P.

Goldman Economist Sees Inflation Hitting U.K. Harder Than Europe

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