Economy

UK inflation to hit 18.6% next year, says Citigroup

Such a rate will squeeze household incomes hard and further push the UK economy into recession

The rate of inflation has exceeded expectations in most months of this year as price rises have spread through the economy

Chris Giles
Mon Aug 22 2022 - 12:32

UK inflation is on course to hit 18.6 per cent in January — the highest peak in almost half a century — because of soaring wholesale gas prices, according to a new forecast from Citigroup based on the latest market prices.

The investment bank predicted that the retail energy price cap would be raised to £4,567 (€5,386) in January and then £5,816 in April, compared with the current level of £1,971 a year — shifts it said would lead to inflation “entering the stratosphere”.

“We now expect consumer price index (CPI) inflation to peak at over 18 per cent in January,” said Benjamin Nabarro, chief UK economist at Citi. That would be higher than the peak of inflation after the second Organisation of Petroleum Exporting Countries (Opec) oil shock of 1979 when CPI reached 17.8 per cent, according to estimates from the Office for National Statistics.

Such a rate of inflation would squeeze household incomes hard and further push the UK economy into recession, but Mr Nabarro said the scale of the likely inflation would push the Bank of England to tighten monetary policy further.

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UK and European wholesale natural gas prices are already trading at close to 10 times normal levels and other forecasters have also raised their inflation predictions.

Goldman Sachs and EY said they expected an inflation rate of at least 15 per cent around the start of next year and the Bank of England said this month that inflation would exceed 13 per cent towards the end of the year.

The energy regulator Ofgem will on Friday announce the energy price cap for the period between October and January, which most analysts expect to rise to more than £3,500 for a household with average usage of energy — an increase of 75 per cent on current levels.

Based on the latest wholesale costs, Citi expects a higher figure for the fourth quarter of £3,717 with forecasts for 2023 looking to be “substantially greater”.

Mr Nabarro said Citi’s new forecasts had taken account of a 25 per cent increase in wholesale gas prices last week and a 7 per cent rise in wholesale electricity prices.

“Even with the economy softening, last week’s data reaffirmed the continued risk of pass through from headline inflation into wage and domestic price setting could accelerate,” he said.

The rate of inflation has exceeded expectations in most months of this year as price rises have spread through the economy. The ONS said it stood at 10.1 per cent in July, the highest level in more than 40 years and the highest rate among G7 countries.

With the energy squeeze likely to intensify, the candidates for the Conservative party leadership have focused their fire on each other’s plans to support households ahead of Ofgem’s announcement on Friday.

Allies of Liz Truss, the front-runner, said she was likely to introduce a package of support alongside tax cuts in an emergency budget in September and that would not be accompanied by independent economic forecasts from the Office for Budget Responsibility because it would be a limited event.

Her rival Rishi Sunak’s team has criticised this approach, saying, “Truss cannot deliver a support package as well as come good on £50 billion worth of unfunded, permanent tax cuts in one go.” — Copyright The Financial Times Limited 2022

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