Citi expects UK inflation to top 18% in January as energy prices soar

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LONDON — UK inflation is on track to top 18% in January as the country’s energy price ceiling enters the stratosphere, Citi economists predict.

In a research note dated Sunday, the US banking giant updated its forecasts for the consumer price index and retail price index to 18% and 21%, respectively, in the first quarter of 2023. This is based on the assumption of a £300 policy. compensation applied to household energy bills from October to 2024.

Energy regulator Ofgem will this week announce the scale of the next price cap increase from October 1, and Citi expects an increase to £3,717 a year ($4,389) from 1 Current £971 for an average household. The price cap essentially limits how much a supplier can charge for its tariffs, but that limit has recently increased due to rising wholesale prices, meaning Britons have seen their bills soar.

Market research firm Cornwall Insight recently predicted the cap would rise to £4,266 in January, while consultancy Auxilione predicted last week that it would top £6,000 by spring.

Benjamin Nabarro, a senior partner in Citi’s global and macro strategy group, said guidance on future increases would be the most notable aspect of this week’s announcement.

“We expect further increases to £4,567 in January and then to £5,816 in April. Risks here remain biased to the upside,” Nabarro said.

The key question now is how government policy might impact both inflation and the real economy after a new prime minister takes office on September 5. suggested.

“We are already seeing a £300 reduction in bills associated with the suspension of the green levy and a reduction in VAT on household energy bills,” Nabarro said.

“However, in reality, any government response to this is likely to involve a lot more fiscal firepower (around £40bn in our estimation). Full compensation for the energy increase would cost around £30bn for the next six months (1.4% of GDP).”

The problem with inflation, he added, is that any fiscal space deployed is likely to be caught between weaker medium-term forecasts and the new government’s desire to cut taxes, meaning that disinflationary measures are “probably a bit further down the pecking order”.

Earlier this month the Bank of England raised interest rates by 50 basis points, its biggest increase since 1995, and predicted the UK’s longest recession since the global financial crisis. It also expects inflation to peak at 13.3% in October.

Citi now expects further monetary tightening of 125 basis points at the next three meetings of the Bank’s Monetary Policy Committee. Inflation in the UK hit 10.1% pa in July and is expected to increasingly exceed the latest MPC projections.

“Even with the economy slowing, last week’s data reaffirmed that the lingering risk of transmission from headline inflation to domestic wage and price setting could accelerate,” Nabarro said.

“With inflation now expected to peak significantly higher than the 13% forecast in August, we expect the MPC to conclude that the risks surrounding more persistent inflation have intensified.”

That would mean getting rates quickly into restrictive territory, and Citi predicts that if signs of more embedded inflation emerge, a benchmark lending rate of between 6% and 7% will be needed to keep inflation under control. The current discount rate is 1.75%.

“At this time however, we continue to believe that the evidence for such effects is limited – with increases in
unemployment is even more likely to allow the MPC to take a break at the turn of the year,” Nabarro added.

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