UK pound bumps near lows on fears of recession and 20% inflation

Goldman Sachs warns of headline inflation peaking above 22% in 2023

Price show no sign of coming down. EPA Bloomberg

The pound is struggling to recover from lows against the dollar amid rampant inflation and fears that a recession is looming.

Early on Tuesday, sterling rose 0.08 per cent to $1.17145, continuing a partial recovery from an almost two-and-a-half year low of $1.16495 reached on Monday.

That remains close to its lowest level since March 2020, and there was minimal change against the euro at 85.4 pence.

Goldman Sachs said on Monday it expected the UK economy go into recession later this year, with the risk that it could turn out to be a deep contraction as energy costs soar.

The UK’s gross domestic product is expected to fall by about 1 per cent through to the middle of 2023, Goldman Sachs said.

The country is reeling from inflation at a 40-year high — at 10.1 per cent and rising — and an 80 per cent rise in the country’s energy price cap announced last week.

The cost-of-living crisis has led to demands for more pay in numerous sectors, with train drivers, airport staff, refuse workers and criminal lawyers going on strike.

Earlier this month the Bank of England announced its biggest interest-rate increase in 27 years. It also said the UK was heading for more than a year of recession under the weight of inflation.

Inflation could exceed 20 per cent early next year, Goldman Sachs warned.

“In a scenario where gas prices remain elevated at current levels, we would expect the price cap to increase by over 80 per cent in January [versus 19 per cent assumed in our baseline],” Goldman economists said.

“[This] would imply headline inflation peaking at 22.4 per cent, well above our baseline forecast of 14.8 per cent.”

Britain's FTSE 100 reversed early losses on Tuesday, as banks and energy stocks bounced back after a rough sell-off in the blue-chip index last week.

The FTSE 100 index was up 0.6 per cent at 0801 GMT, and on track for its best performance in a month.

UK markets were closed on Monday for the August bank holiday and are playing catch-up with European and US markets.