LONDON (Reuters) – Consumer price inflation in Britain is set to peak at 18.6 percent in January, more than nine times the Bank of England’s target, an economist at U.S. Bank Citi said on Monday, raising its forecast again in light of the latest… A 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 clients.
Consumer price inflation was above 18% in 1976.
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Nabarro said the top candidate to become Britain’s next prime minister, Liz Truss, was likely to come up with measures to support families hit by high energy prices, which could lead to a slight reduction in peak inflation.
The energy organization Ofgem is set to set new maximum tariffs for households on Friday, which will take effect in October.
The latest increase in tariffs in April raised the annual bill for a typical household to 1971 pounds ($2,322) from 1,278 pounds, following the rise in natural gas prices after the Russian invasion of Ukraine.
The following increases are likely to be more severe, after natural gas prices rose 15% over the past week.
Citi expects Ofgem to raise the tariff ceiling to the equivalent of 3,717 pounds from October, with further increases to 4,567 pounds in January and 5,816 pounds in April 2023.
Cornwall Insight energy analysts also raised their forecasts for tariffs regulated by Ofgem to 3,554 pounds for the month of October, 4,650 pounds for the month of January and 5,341 pounds for the month of May.
“It’s hard to know how many people will adapt to the coming winter,” Cornwall Insight consultant Craig Lowry said.
In its forecast at the beginning of August, the BoE assumed that the cap would rise to around £3,500 in October and that energy prices would then stabilize. Thus, consumer price inflation will peak at 13.3% in October.
Citi said that with inflation now approaching significantly higher levels, the Bank of England’s Monetary Policy Committee (MPC) was likely to conclude that the risks of continued inflation had intensified.
“This means getting prices well in a restricted area and quickly,” Nabarro said. “Should there be signs of more entrenched inflation, we believe a bank rate of 6 to 7% will be required to control inflation dynamics. For now, though, we continue to believe that the evidence for such effects is limited.”
The Bank of England announced a rare rate hike of half a percentage point earlier this month, and investors are expecting another big move when the Monetary Policy Committee makes its next scheduled monetary policy announcement on September 15.
Nabarro predicted that retail price inflation, which is used to determine the yield on index-linked bonds, would peak at 21.4%.
(dollar = 0.8487 pounds)
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Editing by Catherine Evans
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