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LONDON – UK inflation will exceed 18% in January, as City economists project the country’s energy price cap will enter the stratosphere.
In a research note dated Sunday, the US banking giant updated its forecasts for the consumer price index and retail price index to 18% and 21% respectively in the first quarter of 2023. This is based on an assumption of a £300 policy. The offset has been applied to household energy bills from October to 2024.
Energy regulator Ofgem will this week announce the scale of the next price cap increase from October 1, and the City expects the average household to see a rise from the current £1,971 to £3,717 ($4,389) a year. A price cap essentially limits the amount suppliers can charge for their tariffs, but this cap has recently increased due to rising wholesale prices – meaning Brits have seen their bills skyrocket.
Market research firm Cornwall Insight recently predicted the cap would rise to £4,266 in January, while consultancy firm Auxillion last week predicted it would exceed £6,000 by spring.
Benjamin Nabarro, senior associate in the global strategy and macro group at Citi, said guidance for future hikes was the most notable aspect of this week’s announcement.
“We expect a further increase to £4,567 in January and then to £5,816 in April. The risks here are tilted to the upside,” Nabarro said.
The key question now is how government policy might affect inflation and the real economy after a new prime minister takes office on September 5. Conservative leadership favorite Liz Truss’s comments so far suggest only a “limited offset” to headline inflation. suggested.
“We have already led to a £300 reduction in bills linked to the suspension of the Green Levy and a reduction in VAT on household energy bills,” Nabarro said.
“However, in reality any government response to this would involve significantly more fiscal firepower (around £40bn in our view). To fully offset the energy increase would cost around £30bn over the next six months (1.4% of GDP).”
The problem with inflation is that any fiscal space allocated is likely to be squeezed amid weak medium-term forecasts and the new government’s desire to cut taxes, meaning deflationary measures are “likely to move down the pecking order a bit.”
The Bank of England raised interest rates by 50 basis points earlier this month, its biggest single increase since 1995 and projected the UK’s longest recession since the global financial crisis. It forecast inflation to rise to 13.3% in October.
Citi now expects another 125 basis points of monetary tightening over the next three meetings of the bank’s monetary policy committee. UK inflation hit 10.1% annually in July and is expected to exceed the MPC’s latest projections.
“With the economy softening, last week’s data re-confirmed the risk of an acceleration from headline inflation to wages and domestic price setting,” Nabarro said.
“With inflation now significantly higher than the 13% forecast in August, we expect the MPC to conclude that risks to more sustained inflation have intensified.”
This means the Citi expects rates to move quickly into the restricted area and the benchmark lending rate between 6% and 7% to bring inflation under control as signs of more embedded inflation emerge. Current bank rate is 1.75%.
“For now, though, we think the evidence for such effects is limited — with an increase
Unemployment will give the MPC even more room to pause at the turn of the year,” Nabarro added.