The nation headed into 2022 with optimism for the economy, but hopes of a bumper year of growth unrestrained by Covid restrictions were dashed as the cost-of-living crisis took centre stage.
Just as the worst of the pandemic seemed to be behind us, the emergence of soaring inflation soon became the next big threat to the economy and one which is set to send the UK plunging back into recession.
While Bank of England policymakers had forecast inflation to jump higher as supply chains struggled to keep up with surging demand, they were not prepared for Russia’s invasion of Ukraine on February 24 and the economic onslaught that followed as a result.
As the UK joined its international neighbours in shunning Russian gas and oil, energy prices were quickly sent rocketing higher, pushing inflation to levels not seen for more than 40 years.
Having started the year at 5.5%, Consumer Prices Index (CPI) inflation had jumped to 7% by March already before hitting double digits in July.
Its ascent did not stop there. Amid forecasts that annual household energy bills could hit nearly £3,500 this year, experts predicted that inflation could reach 13.3% by October.
The outlook was even worse for 2023 as grim forecasts at one stage saw energy costs hit £5,400 a year in January 2023 and £7,200 by April.
The Bank, which had started hiking interest rates last December as the so-called beast of inflation emerged, began ramping up its response.
From starting the year at 0.25%, rates were quickly raised at each of the subsequent policymaker meetings throughout the year, including a 0.75 percentage point hike in November, marking the biggest single increase since October 1989.
Rising borrowing costs piled yet more misery on hard-up households and businesses and calls mounted for the Government to step in and provide support.
Amid turmoil at a political level, Britons waited patiently for news on what would happen to the Ofgem price cap before the Government – under the brief and disastrous reign of former prime minister Liz Truss – finally unveiled support to limit bills to around £2,500 a year.
The move helped provide a ceiling to runaway inflation, although it still reached an eye-watering 41-year high of 11.1% in October.
But rather than helping take the pressure off borrowers, the market chaos sparked by Ms Truss and ex-chancellor Kwasi Kwarteng sent mortgage rates racing to highs not seen for decades.
Despite being unwound swiftly, the policies are thought to have inflicted some lasting damage on the economy and the UK’s public finances, while mortgage rates are still higher than they should be.
While initially proving resilient amid the wider turmoil, the UK economy began to slam into reverse in the third quarter, with gross domestic product (GDP) falling by 0.3% and the previously robust jobs market also showed signs of faltering.
It marked what is widely expected to be the start of a prolonged and painful recession, with experts predicting a peak-to-trough fall in output of 2%.
Samuel Tombs at Pantheon Macroeconomics is forecasting 2023 to be the “year of the recession”.
He said GDP is likely to fall by 1.5% year-on-year in 2023, with no sign of a recovery until early 2024.
With rates ending 2022 at 3.5% – a 14-year high – this will further hold back consumer spending, hitting some four million mortgage borrowers who are due to refinance next year, according to the Bank of England.
But the expected recession will also help rein in inflation, which will allow the Bank to take its foot off the pedal.
Mr Tombs said: “We expect the MPC to raise Bank Rate to 4% in February, but then to stand pat in March.
“Eventually, the MPC will cut Bank Rate again… but we think the Monetary Policy Committee will wait until early 2024 to begin to reduce Bank Rate, and only then by 50 basis points to 3.5% by the end of the year.”
Martin Beck at the EY Item Club is slightly more optimistic, as he believes households still have some savings built up during Covid that they can dip into.
“Consumer spending is therefore unlikely to fall to the same extent as real incomes. And falling inflation over the course of next year offers hope of a return to growth later in 2023,” he said.