London (24/08 – 33.33) UK inflation could soar to 18.6 per cent by the start of 2023, experts have forecast, as the increase in energy prices continues to push up the cost of living.
It comes as CPI inflation already hit a new record-high of 10.1 per cent in July, as soaring food costs pushed the metric into double digits for the first time since 1982.
The Bank of England are predicting inflation could peak at 13 per cent by the end of the year, but economists at US bank Citigroup is today warning that it may soar to over 18 per cent by the start of 2023.
Citigroup expects inflation to reach 18.6 per cent in January, in response to the sharp increase in the energy price cap which is expected to surpass £4,500 in January.
Just last week the investment bank predicted inflation would rise to 15 per cent by the turn of the year, with the new estimate showing just how volatile the situation is.
“We now expect CPI inflation to peak at over 18 per cent in January,” said Benjamin Nabarro, chief UK economist at Citi.
If this level was reached, it would be higher than the peak of inflation after the second Opec oil shock of 1979, which saw CPI soar to 17.8 per cent, according to estimates from the Office for National Statistics.
Such a staggering rate of inflation would prove catastrophic for millions of households already struggling to make ends meet and push the UK economy into recession.
But Mr Nabarro said the scale of the likely inflation would push the Bank of England to tighten monetary policy further.
Citigroup’s latest predictions state that the price cap would be raised to £4,567 in January and then £5,816 in April – shifts it said would lead to inflation “entering the stratosphere”.
The price cap is currently at £1,971 a year, up from £1,277, and it is set to significantly rise again from October.
Ofgem is set to announce the new price cap on Friday, with experts predicting the cap will be set at about £3,576.
The price cap could then hit £4,266 next year, according to consulting group Cornwall Insight.
This would leave households with bills of around £355 a month at a time when households are already feeling significant financial pressures with prices rising faster than wages.
A grim forecast also warns the price cap could rise above £6,000 a year for the average household by next April. Consultancy Auxilione made the prediction based on Friday’s gas price amid continuing volatility in the market.
The rapid increase in energy costs was initially prompted by demand exceeding supply as economies kickstarted again following the relaxation of Covid restrictions.
The energy sector has also had to grapple with global supply chain issues since Russia invaded Ukraine at the start of the year, which saw the price of commodities such as natural gas surge.
It is the rising price of wholesale gas that is to blame for the bulk of the crisis.
Greg Jackson, founder and chief executive of Octopus Energy, compared beer to gas prices and stated that if the price had risen at the same rate as energy, a pint could cost £25.
Alongside surging gas prices, everyday items are also rocketing.
Food and non-alcoholic drinks were the largest contributor to rising prices in July, according to the Office for National Statistics.
The price of bread, cereals, milk, cheese and eggs rose the fastest, while the cost of vegetables, meat and chocolate were also higher.
Prices also rose for other household staples such as toilet rolls, pet food and toothbrushes.
The crisis will be at the top of the agenda for whoever is chosen as the new Tory leader and Prime Minister on 5 September with both candidates under pressure to provide immediate financial relief to vulnerable households.