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Double digit inflation 'believable' after Russia sanctions, MPs told

Double digit inflation 'believable' after Russia sanctions, MPs told
Predictions of 11 per cent inflation peak are 'believable', says Stephen Millard

The UK could see inflation peak in the double digits as sanctions imposed on Russia take their toll on this country's economy, the Treasury Committee has heard.

Stephen Millard, deputy director for macroeconomic policy at the National Institute of Economic and Social Research, told MPs he was certain that inflation would rise as a result of the deepening crisis surrounding Russia's invasion of Ukraine, and added this could even lead to a recession.

The Office for Budget Responsibility in its latest forecast expected inflation to peak at 7.25 per cent in April.

But since then Russia has advanced its military operation in Ukraine and in retaliation been subjected to a raft of economic sanctions from the west, including the US, UK and EU, effectively cutting the country, a massive oil and gas exporter, off from the global financial system.

NIESR is in the process of modelling the economic impact from the fallout but has not yet reached a conclusion.

Speaking before the committee yesterday (February 28) Millard said: "What is fairly clear is that the Ukrainian situation, and in particular the sanctions, are going to lead to a large increase in energy prices, that is for sure, and that is going to add to inflation.

"So inflation is going to peak, I would imagine now, higher than we were expecting," adding: "It could be pretty significant".

Press reports have commonly cited revised estimations of a peak of inflation at above 8 per cent but Treasury committee chairperson Mel Stride said he had come across predictions as high as 11 per cent.

Millard would not be drawn on a specific figure but said predictions of inflation peaking as high as 11 per cent were "believable".

He said: "I do not think these are wildly inaccurate forecasts but I would not like to get drawn on what exactly I think the number is, but it will be higher, that is for sure, and that will hit households who are already facing a big cost of living increase."

Inflation has been exceeding the Bank of England's 2 per cent target each month since May last year, and in January reached its 30-year high of 5.5 per cent.

Meanwhile, the energy price cap is due to be raised in April, alongside a 1.25 percentage point hike in National Insurance contributions.

The Bank has started to raise interest rates to counteract rising inflation. In February it raised the base rate to 0.5 per cent, the second increase in as many months.

Asked how a higher peak of inflation could translate into further interest rate rises, Millard said it would depend on whether the cost of living crisis ends up leading to a recession.

"If it were me I would probably allow inflation to go up and hold interest rates lower than otherwise to deal with the uncertainty [and] possible recession," he said.