Citi expects UK inflation to exceed 18% in January as energy prices skyrocket
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LONDON – Citi economists expect UK inflation to exceed 18% in January as the country’s energy price ceiling enters the stratosphere.
In a research note dated Sunday, the US banking giant updated its forecasts for the Consumer Price Index and the Retail Price Index to 18% and 21% respectively in the first quarter of 2023. This is based on the assumption of a £300 policy that applies compensation to household energy bills from October Until 2024.
This week, energy regulator Ofgem will announce the size of the next price cap increase from October 1, and Citi expects it to rise to £3,717 a year ($4,389) from the current £1,971 for the average family. The price cap essentially limits the amount a supplier can charge for its tariffs, but that limit has recently been raised due to a rise in wholesale prices – meaning Brits have seen a sharp rise in bills.
Market research firm Cornwall Insight recently forecast the cap will rise to £4,266 in January, while consultancy Auxilione last week predicted it will top £6,000 by spring.
Guidance on future increases will be the most notable aspect of this week’s announcement, said Benjamin Nabarro, senior coordinator of global strategy and macro group at Citi.
“We expect further increases to 4,567 pounds in January and 5,816 pounds in April. The risks here remain skewed to the upside,” Nabarro said.
The main question now is how government policy can affect both inflation and the real economy after a new prime minister takes office on September 5th. Comments so far from Liz Truss, a favorite of the Conservative leadership, suggest only “limited compensation” for headline inflation. I suggested.
“We are already calculating a £300 reduction in bills associated with the suspension of Green Levy and a reduction in value-added tax on household energy bills,” Nabarro said.
“However, in reality, any government response to this is likely to include greater financial firepower (around £40 billion in our opinion). Fully offsetting the capacity increase would cost around £30 billion for the next six months (1.4% of Gross domestic product).
The inflation issue, he added, is that any fiscal space deployed is likely to shrink between the weaker medium-term outlook and the new government’s desire to cut taxes, which means inflation-cutting measures are “likely to go down somewhat in the order of the day.”
The Bank of England earlier this month raised interest rates by 50 basis points, the largest single increase since 1995, and predicted the UK’s longest recession since the global financial crisis. It also expected inflation to peak at 13.3% in October.
Citi now expects another 125 basis points of monetary tightening at the next three meetings of the Bank’s Monetary Policy Committee. UK inflation hit 10.1% annualized in July and is increasingly expected to exceed the MPC’s latest forecast.
“Even with the economy declining, last week’s data reaffirmed the continuing risk of moving from headline inflation to wages, and domestic price determination could accelerate,” Nabarro said.
“With inflation now poised to peak well above the 13% forecast in August, we expect the MPC to conclude that risks surrounding persistent inflation have intensified.”
This could mean putting interest rates in a restricted area quickly, and Citi expects that if there are signs of more implicit inflation, a benchmark lending rate between 6% and 7% will be necessary to control inflation. The current bank rate is 1.75%.
“Currently, though, we still believe the evidence for such effects is limited — with an increase in
Unemployment is likely to allow the MPC to stop early in the year.”