UK inflation to top 18% in early 2023 says Citi

Consumer price inflation in the UK is set to peak at 18.6% — which is nine times the target of the UK’s central bank — in early 2023, an economist at US bank Citi said on Monday.

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 question now is what policy may do to offset the impact on both inflation and the real economy,” Nabarro said in a note to clients.

Consumer price inflation was last above 18% in 1976.

Nabarro said in the note that the front-runner to become the UK’s next prime minister, Liz Truss, was likely to come up with measures to support households that would have a limited offsetting impact on headline inflation.

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, the note said.

“This means getting rates well into restrictive territory, and quickly,” Nabarro wrote.

“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.”

Nabarro said he expected the UK’s retail price index, used to set the return on inflation-linked bonds, would peak at over 20%.

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