UK inflation is expected to hit 18.6% in January – the highest level in nearly half a century – due to soaring wholesale gas prices, according to a new Citi forecast based on latest market prices.
The investment bank predicted the retail energy price cap would be raised to £4,567 in January and then to £5,816 in April, from the current level of £1,971 a year – changes that , she argued, would lead to inflation “entering the stratosphere.”
“We now expect CPI inflation to peak at over 18% in January,” said Benjamin Nabarro, chief UK economist at Citi. That would be higher than the peak of inflation after OPEC’s second oil shock of 1979, when the CPI hit 17.8%, according to estimates from the Office for National Statistics.
Such a rate of inflation would squeeze household incomes sharply and push Britain’s economy further into recession, but Nabarro said the scale of inflation likely would cause the Bank of England to tighten monetary policy further.
Wholesale natural gas prices in the UK and Europe are already trading at almost 10 times normal levels and other forecasters have also raised their inflation forecasts.
Goldman Sachs and EY said they expect inflation to be at least 15% early next year and the Bank of England said this month that inflation would exceed 13% by the end of the year. end of the year.
Energy regulator Ofgem will announce the energy price cap for the October-January period on Friday, which most analysts expect to be over £3,500 for a household with an average consumption of energy, a 75% increase from current levels.
Based on the latest wholesale prices, Citi expects a higher Q4 figure of £3,717, with forecasts for 2023 appearing to be “significantly higher”.
Nabarro said Citi’s new forecast took into account a 25% increase in wholesale gas prices last week and a 7% increase in wholesale electricity prices.
“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,” he said. .
The inflation rate has exceeded expectations in most months of this year as rising prices have spread throughout the economy. The ONS said it stood at 10.1% in July, the highest level in more than 40 years and the highest rate among G7 countries.
With the energy shortage set to intensify, Tory leadership candidates focused their fire on each other’s plans to support households ahead of Ofgem’s announcement on Friday.
Allies of favorite Liz Truss have said she is likely to introduce a package of support measures alongside tax cuts in an emergency budget in September that will not be accompanied by an independent economic forecast from the Office for Budget Responsibility because it would be a limited event. .
Rival Rishi Sunak’s team criticized the approach, saying: ‘Truss can’t deliver a support package and get £50billion in permanent, unfunded tax cuts all at once’.