UK’s Inflation Rate To Hit 18% In Early 2023, Citi Forecasts

Inflation in the UK will peak at 18% early next year as consumers count the cost of the deepening energy crisis, one of the world’s biggest banks predicted.

Forecasters at the US financial services group Citi said it expects the consumer prices index to breach 18% in the first quarter of 2023, while the retail prices index inflation rate will soar to 21%.

The prediction outstrips previous modelling of the impact of rising costs. Earlier this month the Bank of England said it expected inflation to reach 13% by the end of the year as it raised interest rates for a sixth successive time.

Separately, the Resolution Foundation thinktank has forecast inflation could reach as high as 15% by early 2023.

However, on Monday Citi said the inflation rate was likely to be even higher next year with a peak of more than 18% in January.

The last time UK inflation reached those heights was in 1976 when an oil supply shock ripped through the global economy and left the UK seeking a bailout from the International Monetary Fund.

Benjamin Nabarro, the chief UK economist at Citi, said its forecasts had been updated after a 25% and 7% rally in UK gas and electricity prices respectively last week. On Monday, the price of gas for delivery to the UK next month rose even further, up almost 20% to 550p a therm after the Russian state-owned operator Gazprom announced unscheduled maintenance on the Nord Stream 1 gas pipeline into Europe.

It predicts typical dual-fuel tariff energy bills will hit £3,717 in October, higher than most forecasts of between £3,500 and £3,700. Ofgem, the energy regulator for Great Britain, will announce the level of the next price cap on Friday.

Citi also predicted the cap would rise to £4,567 in January – about £300 higher than some forecasts – before reaching £5,816 in April.

Energy bills have rocketed this year as high wholesale gas prices, in part down to Russia’s invasion of Ukraine, have fed through into bills.

The government is examining options to tackle the crisis including ramping up an existing support package, which gives £400 to every household from October, and a “tariff deficit scheme” pushed by suppliers.

Bill Bullen, the chief executive of Utilita, on Monday called for the Conservative party to end its leadership contest early so that the energy crisis could be tackled immediately.

Citi said it expects at least a £300 reduction in bills as a result of an anticipated cut to VAT on household energy bills and a suspending of green levies on bills.

However, it added: “In reality, any government response to this is likely to involve substantially more fiscal firepower (around £40bn in our view).” Citi analysts said offsetting the energy increase in full would cost £30bn, equivalent to 1.4% GDP, for the next six months. The Labour leader, Keir Starmer, has presented a £29bn plan to freeze bills for six months, the Guardian reported on Monday.

Nabarro added: “The issue for inflation is whatever fiscal space is deployed is likely to be squeezed between weaker medium-term forecasts and the desire to cut taxation.

“This means disinflationary measures are likely somewhat further down the pecking order.”

Analysts at RBC said global gas traders including Shell would benefit from higher prices, as well as the power station owner Drax and the energy group SSE.

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