UK inflation rises to 18% in early 2023, Citi warns

  • Citi sees UK CPI peak at 18.6% in January
  • BoE May Need To Raise Rates To 7% If Inflation Continues
  • Ofgem limit reaches £3,717 in October, £5,816 in 2023
  • BoE forecasts inflation to peak at 13.3% in October

LONDON, Aug. 22 (Reuters) – UK consumer price inflation will peak at 18.6% in January, more than nine times the Bank of England target, an economist at US bank Citi said Monday, raising his forecast again in the light of the latest jump in energy prices.

“The question now is what policy can do to offset the impact on both inflation and the real economy,” Benjamin Nabarro said in a note to customers.

Consumer price inflation was last above 18% in 1976.

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The frontrunner to become Britain’s next prime minister, Liz Truss, is likely to come up with measures to support households hit by rising energy prices, which could slightly lower the inflation peak, Nabarro said.

Energy regulator Ofgem will set new maximum rates for households on Friday, which will take effect in October.

The latest tariff hike in April raised the annual bill for an average household to £1,971 ($2,322) from £1,278, following a surge in natural gas prices following Russia’s invasion of Ukraine.

Subsequent increases are likely to be even steeper, following a 15% increase in natural gas prices over the past week.

Citi predicts that Ofgem will increase the tariff cap to the equivalent of £3,717 from October, with further increases to £4,567 in January and £5,816 in April 2023.

Energy analyst Cornwall Insight also raised their forecasts for Ofgem’s regulated tariffs to £3,554 for October, £4,650 for January and £5,341 for May.

“It’s hard to estimate how many people will be able to handle this coming winter,” said Cornwall Insight consultant Craig Lowrey.

In its early August forecasts, the BoE assumed that the ceiling would rise to around £3,500 in October and that energy prices would stabilize. Consumer price inflation should therefore peak at 13.3% in October.

With inflation expected to spike significantly higher, the BoE’s Monetary Policy Committee would likely conclude that risks of more persistent inflation had increased, Citi said.

“This means rates are getting way into the restrictive area, and fast,” Nabarro said. “Should there be any signs of more embedded inflation, we believe a bank rate of 6-7% will be needed to bring inflation dynamics under control. For now, however, we continue to believe that the evidence for such effects is limited.”

The BoE announced a rare half-point rate hike earlier this month and investors expect another big step when the MPC makes its next scheduled monetary policy announcement on September 15.

Nabarro predicted that retail price inflation, which is used to determine indexed bond yields, would peak at 21.4%.

($1 = 0.8487 pounds)

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Editing by Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.

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