Citi bank has forecast that inflation will hit 18.6% in January, Reuters has reported.
The US bank says it expects the energy price cap to rise to £3,717 in October, £4,567 in January and £5,816 in April.
According to Reuters, Citi chief UK economist Benjamin Nabarro said in a note to clients: “The question now is what policy may do to offset the impact on both inflation and the real economy.”
This comes after inflation in the UK reached 10.1% in July, setting a new 40-year record high.
If inflation reaches 18.6% at the start of next year, it would be higher than the peak in 1979, according to Interactive Investor head of investment Victoria Scholar.
Nabarro’s note said: “With inflation now set to peak substantially higher than the Bank of England’s 13% forecast in August, its Monetary Policy Committee was likely to conclude that the risks of more persistent inflation have intensified.”
“This means getting rates well into restrictive territory, and quickly,” Nabarro said.
“Should signs of more embedded inflation emerge, we think bank rate of 6-7% 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,” he added.
Earlier this month, the Bank of England (BoE) increased the base rate by 50 basis points to 1.75%.
The increase marked the sixth base rate rise since December 2021 after a decade of historic lows. Interest rates are now at their highest since December 2008.
Nabarro said he expected Britain’s retail price index would peak at over 20%.
Commenting on Citi’s forecast, Hargreaves Lansdown senior personal finance analyst Sarah Coles says: “Inflation at 18.6% would push millions of people into dire straits. And because these horrible price hikes are being driven by the essentials people need to stay alive – like food and heat – it’s going to hit those on lower incomes hardest, who have got nothing left to give.”
“A winter of woe is looming amid these frightening forecasts and there is little help in sight to stop a spiral of debt as Shocktober approaches.”
“The hikes in the energy price cap are responsible for the lion’s share of the increase. The BoE had forecast for inflation to peak at 13% in the autumn, but gas prices have been climbing ever since, and Citi says it’s going to get far worse.”
Coles adds: “Anyone carrying variable-rate debts will then be hit even harder when the Bank of England hikes rates to try to keep a lid on prices. Rising prices and tightening belts are also making recession more likely – which would force people out of work, and make a desperate situation completely impossible.”
She says the UK can “still cling to the hope that there will be more help on offer”.
“However, so far, Liz Truss, the frontrunner in the leadership election, hasn’t promised anything concrete to help with bills beyond cutting green levies and VAT – which are a drop in the ocean.”
“There may well be more forthcoming as prices rise, focused on those who are most vulnerable and least able to cope with rising costs. However, we just don’t know. If we have to wait for an emergency Budget well into September to find out, it means weeks of desperate worry and uncertainty on top of everything else.”
