Just as consumers are getting used to double-digit inflation, a new forecast says U.K. inflation could reach 18.6% early next year.
The eye-popping forecast, from Citi chief U.K. economist Benjamin Nabarro, comes as U.K. electricity prices are set to surge once the Office of Gas and Electricity Markets lifts the price cap.
U.K. gas prices soared 25% last week, and electricity prices rose 7%. The typical dual fuel tariff is estimated to rise to £3,717 in October, from a current price of £1,285. By April, that will reach £5,816, the Citi economist says.
The question is what the new U.K. prime minister, likely to be Liz Truss, will do about it. Nabarro is assuming a £300 reduction in bills by suspending a green levy and by cutting value-added taxes on household energy bills. To offset the energy increase in full, it would require £30 billion for the coming six months, or 1.4% of GDP.
“The issue for inflation is whatever fiscal space is deployed is likely to be squeezed between weaker medium term forecasts and the desire to cut taxation. This means disinflationary measures are likely somewhat further down the pecking order,” he says.
The Bank of England may have to take interest rates as high as 7% to bring inflation under control, from 1.75% currently, he says. The yield on the 2-year gilt TMBMKGB-02Y, 2.588% rose 4 basis points to 2.54%.