UK economy handed financial bombshell: Warning on inflation worse than '79 – Citi forecast

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The massive inflation is primarily due to the skyrocketing wholesale gas prices, and is predicted by a new forecast from Citi based on the latest market prices.

According to the investment bank, the retail energy price cap will reach £4,567 in January, followed by £5,816 in April.

This is compared with the current level of £1,971 a year.

Citi said this would lead to inflation “entering the stratosphere”.

Benjamin Nabarro, chief UK economist at Citi, said: “We now expect CPI inflation to peak at over 18 per cent in January.” 

This is higher than the peak of inflation after the second Opec oil shock in 1979, at which time CPI reached 17.8 percent, according Office for National Statistics estimates. 

Mr Nabarro said the scale of the projected inflation would likely prompt the Bank of England (BoE) to tighten their monetary policy with higher interest rates to avoid the devastating squeeze this will have on already tight household budgets.

Writing for the Telegraph economist Roger Bootle argued the BoE must take this route even if it means causing the economy “pain” in the process.

He said this was to protect those on lower incomes.

UK and European wholesale natural gas prices are already trading at ten times normal levels. 

Other forecasters have made similarly dire predictions. 

Goldman Sachs and EY have predicted an inflation rate of at least 15 percent next year.

Meanwhile, the BoE announced this month that inflation would exceed 13 percent as the year draws to a close. 

This Friday will see Ofgem announce their new energy price cap for October to January. 

According to the Financial Times, most analysts expect to see a rise to more than £3,500 for a household with average usage of energy — an increase of 75 per cent on current levels.

Citi, meanwhile, has predicted even higher – a rise to £3,717, with forecasts for 2023 looking to be “substantially greater”.

Mr Nabarro added that their predictions took into account a 25 percent increase in wholesale gas prices last week, and a seven percent rise in wholesale electricity prices.

He said: “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.”

 

The ONS said inflation stood at 10.1 percent in July – the highest level in over 40 years, and the highest among G7 countries. 

The issue of how to deal with the crisis has become central to the Conservative leadership contest.

Liz Truss’ allies say she is likely intending to bring in a package of support alongside tax cuts in an emergency Budget in September. 

The foreign secretary had previously insisted she was focused on tax cuts rather than what she termed “giving out handouts”.

But her rival Rishi Sunak’s team has criticised this approach, saying, “Truss cannot deliver a support package as well as come good on £50bn worth of unfunded, permanent tax cuts in one go”.

He has also suggested her tax cuts will only worsen inflation, with his campaign team saying her strategy risks plunging the economy into an “inflation spiral”.



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