UK inflation set to peak at 18% in early 2023, warns Citi


Inflation will peak at 18.6% in early 2023 and the Bank of England could need to hike interest rates to 7% to get it under control, warns Citi

  • The investment bank told clients that energy bills are likely to rise further
  • It said the Bank of England could look to accelerate its hiking cycle  

The UK inflation rate is set to peak at a near 50-year-high of 18.6 per cent early next year with energy prices set to soar, investment bank Citi has warned.

Citi economist Benjamin Nabarro now forecasts the retail energy price cap will jump from its current level of £1,971 to £4,567 a year by January, before peaking at £5,816 in April.

Energy prices have been a key driver of consumer price inflation, which hit 10.1 per cent in July, and Nabarro said the Bank of England could have to hike interest rates to as much as 7 per cent to get spiralling prices under control.

Energy has been a key driver of consumer inflation with the retail price cap set for further hikes approaching winter

Energy has been a key driver of consumer inflation with the retail price cap set for further hikes approaching winter 

Forecast: Citi says CPI inflation will peak at 18% early next year and will remain in double digits for most of 2023

Forecast: Citi says CPI inflation will peak at 18% early next year and will remain in double digits for most of 2023

In a note to clients, he said: ‘The question now is what policy may do to offset the impact on both inflation and the real economy.

‘This means getting rates well into restrictive territory, and quickly.

‘Should signs of more embedded inflation emerge, we think Bank Rate of 6 to 7 per cent will be required to bring inflation dynamics under control.

‘For now though, we continue to think evidence for such effects are limited with increases in unemployment still more likely to allow the MPC to pause around the turn of the year.’

Nabarro also told clients that policies proposed by Tory leadership front runner Liz Truss to support households are likely to have a limited impact on offsetting inflation, which expectations that the retail price index could peak at over 20 per cent.

Markets are currently predicting Bank of England will raise interest rates to 3.75 per cent by March 2023, while former MPC member Andrew Sentence said recently that the bank could need to raise rates to between 3 per cent and 4 per cent by the end of this year.

In efforts to get inflation under control the Bank of England has already began hiking rates, with the most recent a half a percentage point jump to 1.75 per cent.

But the supply-side nature of current inflationary pressures means that rate hikes ultimately have a limited impact on headline inflation, while also serving to restrict economic growth.

The Bank of England now forecasts the UK will enter five consecutive quarters of recession from October this year.

Energy prices are a major driver of inflation, piling cost pressures on all areas of the economy, and have also become a key factor in the cost of living crisis.

Analysts at Cornwall Insight are currently forecast that the energy price cap will rocket from £1,971 to £3,582 by next year.

CPI inflation hit 10.1% in July: It's the highest inflation has been for 40 years

CPI inflation hit 10.1% in July: It’s the highest inflation has been for 40 years

Cornwall Insight expects the energy price cap to hit £3,582 by next year

Cornwall Insight expects the energy price cap to hit £3,582 by next year

Victoria Scholar, of Interactive Investor, said: ‘Price levels are ‘entering the stratosphere’ according to Citi, with inflation set to peak above 18 per cent at the start of the year.

‘That’s higher than the peak from 1979 when CPI hit 17.8 per cent on the back of the OPEC oil shock. 

‘Price levels have already been pushed into double digits in the latest reading for July, ahead of analysts’ expectations, paving the way for further forecast topping readings.

‘Many individuals and businesses are feeling the squeeze, struggling with inflation that feels a lot higher than the official figures suggest.

‘The rise in gas and food prices look set to push price levels higher, as the Bank of England’s interest rate increases, so far, seem to be doing little to offset supply side inflationary pressures imported from abroad. 

‘Supply chain bottlenecks, the war in Ukraine, and Brexit have all contributed to the post-pandemic revival in inflation with price levels on track to reach perilous heights by the start of 2023.

‘It looks like a recession is almost an inevitability at this stage – with record low consumer confidence, the latest GDP figures pointing to a contraction, and now these fresh eyewatering inflation forecasts.’

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