U.K. inflation will exceed 18% in January: Citi

United Kingdom is on course to see inflation exceed 18% in January as the Office of Gas and Electricity Markets continues to lift energy price cap, says Benjamin Nabarro. He’s the Chief U.K. Economist at Citi.

Annual energy price cap to hit £5,816 in April 2023

Nabarro expects the annual cap to hit £4,567 in January and continue its move up to £5,816 in April. In comparison, a typical dual fuel tariff currently sits at about £1,285.

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The incoming prime minister set to take office on September 5^th could terminate a Green Levy and lower VAT on household energy bills. Nabarro assumes “that” to reduce bills by £300 but said:

In reality, any government response to this is likely to involve substantially more fiscal firepower. Offsetting the energy increase in full would cost around £30 billion for the coming six months (1.4% GDP).

Benchmark lending rate could go as high as over 6.0%

Nabarro forecasts the Bank of England will raise rates by another 125 basis points over the next three meetings even though the economy contracted in the second quarter of 2022.

That’s because consumer prices in July were up an alarming 10.1% on a year-over-year basis.

Last week’s data reaffirmed the continued risk of pass-through from headline inflation into wage and domestic price setting could accelerate. We expect the MPC will conclude the risks surrounding more persistent inflation have intensified.

Benchmark lending rate is 1.75% at present. But stickier inflation could make the Monetary Policy Committee raise it to over 6.0%, he concluded.

Despite the macro headwinds, the blue-chip FTSE 100 index is flat for the year.