Inflation in the UK is set to reach a near 50 year high of 18.6% early next year with energy prices set to soar.
These findings have been released by investment bank, Citi. Their Economist, Benjamin Bararro, has forecasted that the retail energy price cap is set to jump from its current £1,971 to £4,567 a year by January 2023, before peaking at £5,815 by April next year.
Rising energy prices have been a key driver behind the rise of consumer price inflation in the UK, which hit double figures of 10.1% last month (Source: Proper Finance). In order to get spiraling prices under control, interest rates may need to be set as high as 7%.
Nabarro said in a note to Citi clients that 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 a 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 went on further to inform clients that financial policies that have been proposed by Conservative leadership front-runner, Liz Truss, to support UK householders are unlikely to majorly offset the impacts of inflation.
The Bank of England has already been making several efforts to get inflation under control in the UK. However, even by hiking up interest rates, this has still had a limited impact on growing inflation, as well as serving to actually restrict the UK’s economic growth.
The Bank of England has further forecast that the UK is set to enter five consecutive quarters of recession from October this year.
They forecast that from October, the cap is set to £3,553, falling slightly below their previous estimations. Their January prediction however is £400 more than their previous, now at £4,650.
The Head of Investment at Interactive Investor, Victoria Scholar, spoke of inflation that will soon be “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.”
Scholar went on to say that 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.”