Infaltion to hit 18.6% by January as gas prices continue to surge, Citi warns

Inflation is set to surge to 18.6 per cent in January and average energy bills will hit £5,816 by April, according to an alarming new forecast from investment bank Citi.

Analysts predict that another surge in gas prices last week will push the rate of inflation far higher than even the Bank of England has forecast.

Based on the latest market prices for gas, Citi now expects energy regulator Ofgem’s price cap to hit £4,567 in January and then £5,816 in April, compared with the current level of £1,971 a year.

That would lead to inflation “entering the stratosphere” and peaking higher than even after the oil crisis of 1979, the bank said in a note.

“We now expect CPI inflation to peak at over 18 per cent in January,” said Benjamin Nabarro, chief UK economist at Citi.

Such massive price increases would hammer UK households’ incomes and likely push the UK economy deeper into recession.

Consultancy firm EY and investment bank Goldman Sachs both forecast inflation will surpass 15 per cent early next year while the Bank of England said this month that inflation would hit 13.4 per cent in the final quarter of 2022.

The dire forecasts add to pressure on the government to provide further financial support to consumers who face unaffordable bills.

Yet ministers have so far declined to offer additional help as the Tory party awaits a vote on who will lead the country after Boris Johnson steps down as prime minister.

Meanwhile, the gas crisis is gathering pace, with prices already at close to 10 times normal levels and no sign that things will ease before the winter.

Wholesale gas prices rose by 25 per cent last week alone and electricity was up 7 per cent.

In Germany, Europe’s economic powerhouse, industry faces a three-day week as supplies are rationed. Flows of gas from Russia which supplied a third of the continents gas little more Ethan a year ago, have dwindled to 10 per cent of their previous level, raising the prospect of blackouts and widespread rationing during the colder months.

On Friday, Ofgem will announce the price cap for October to January, which is expected to be close to £3,600 a year for an average household.

The cap is based on recent wholesale energy costs which, according to Citi, indicate the cap will rise to £3,717 before going “substantially” higher next year.

“Even with the economy softening, last week’s data reaffirmed the continued risk of pass through from headline inflation into wage and domestic price setting could accelerate,” Mr Nabarro said.

Government action to freeze gas prices – as other countries in Europe have done – would bring the peak of inflation down. Without further action the Bank of England will have little choice but to aggressively hike interest rates in an attempt to bring inflation under control.

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