The Economic Consequences of the Ukraine War for UK Household Incomes

Main points

• Higher commodity prices and trade spillovers represent major channels through which the war will affect economic activity in the UK, and increased uncertainty weighing on confidence also has the potential to further reduce growth.
• Higher inflation, both directly as a result of higher commodity prices and indirectly through increased unit costs, will add to the squeeze on real household incomes.
• If rising inflation leads to significantly tighter monetary policy, there will be a further reduction in demand, but if monetary policy is not tightened then inflation could be even higher and more persistent.
• There needs to be larger fiscal policy responses, as the only agent with the capacity to smooth the shock to national income without exacerbating it in the short-to-medium term is the government.