UK inflation is on track to rise above 18% for the first time in almost half a century next year as energy prices rocket, according to the investment bank Citigroup.
Using forecasts for the retail energy price cap, which analysts expect to rise to close to £6,000 in April from £1,971 currently, Citi’s UK economist Benjamin Nabarro said in a note that the consumer prices index of inflation will peak at 18.6% in January.
The last time inflation was higher than 18.6% was in 1976, after an oil supply shock that devastated the global economy and left the UK seeking a bailout from the International Monetary Fund. It last matched that level in 1980, according to Bloomberg figures.
Nabarro warned that “the risks remain skewed to the upside” and the Bank of England may have to raise interest rates to 6% or 7% “should signs of more embedded inflation emerge.” He added that rising unemployment was likely to limit the need for such sharp increases.
Earlier this month the BOE predicted that inflation would peak at “just over 13%” at the end of this year. Markets have been expecting rates to reach 3.5%.
Nabarro’s forecasts assumed a £300 reduction in household energy bills from cuts to green levies and VAT, as proposed by candidates in the Tory leadership battle.
Nabarro said the government is likely to go far further, with a support package for the economy of around £40 billion.