UK inflation tipped to hit 18%
Inflation is forecast to hit a 50-year high in the UK of just over 18% in January, putting pressure on the Bank of England to increase interest rates to get the economy under control.
The investment bank Citigroup warned that inflation was ‘‘entering the stratosphere’’, adding to the strain on households already struggling with the cost of living crisis.
It said the Bank of England might be forced to raise interest rates from the present level of 1.75% to as high as 7% to stop price increases becoming embedded.
In other developments:
Gas prices rose by 37% yesterday after Russia said it would shut down a critical pipeline to Europe for three days for maintenance.
Shoppers are already suffering a hit of more than £160 (NZ$305) a month to their disposable income, according to data from Asda, with under-30s bearing the brunt of the increasing cost of essentials such as food, rent and transport.
Spiralling prices increased the pressure on Liz Truss, the frontrunner in the Tory leadership contest, to set out more details of her plans to help those who are struggling.
On Friday Ofgem, the energy regulator, is expected to announce that the energy price cap will rise from £1971 to £3500 in October. Truss is determined to wait until after the contest ends on September 5 to announce detailed plans.
Rishi Sunak, the former chancellor of the exchequer and Truss’s rival for the leadership, claimed yesterday that her intended strategy of cutting taxes would worsen the situation. ‘‘Tax cuts sound nice,’’ his spokesman said, ‘‘but they will make the situation worse while doing nothing to help people in the short term with the cost of living.’’
A source close to Truss said: ‘‘These figures show the need for a change to the economic orthodoxy, increasing growth and stopping tax rises so people can keep more of their own money.’’
Yesterday Truss insisted she would push ahead with tax cuts in the first days of her premiership. However, she downgraded her promised emergency budget to a ‘‘fiscal event’’.
Sunak allies questioned whether she would ‘‘come good’’ on the promise.
If inflation hits 18%, prices will rise at nine times the Bank of England’s 2% target rate. The last time inflation was that high was in 1976.
Benjamin Nabarro, chief UK economist at Citi, said in a note to clients that affordability concerns were ‘‘growing more deafening by the day’’, with households on course to suffer an unprecedented drop in real incomes over the next two years. Inflation is now 10.1% and is expected to peak at 13% in October, according to the Bank of England.
However, a surge in global gas prices over the past two weeks has led many private sector forecasters to project an even higher inflation peak at the start of next year, when the energy price cap is set to climb further.
According to projections by the energy analyst Auxilione, bills could reach £4650 a year in January and £5456 in April.
Electricity for the coming winter in Britain is now trading at more than £600 a megawatt-hour, having risen almost 50% in the past month.
Nabarro said inflation could force interest rates to higher than twice the rate money markets are predicting. ‘‘Should signs of more embedded inflation emerge, we think a bank rate of 6 to 7% will be required to bring inflation under control,’’ he said.