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, leaving millions of people in “dire straits” according to alarming new forecasts that suggest the UK’s energy crisis will stretch on for years.

Experts warned that current policies to tackle the crisis risked being a “sticking plaster” and that fundamental reform was needed of the way energy is delivered in the UK.

Analysts at investment bank Citi 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, adding that “affordability concerns were growing more deafening by the day”.

The question now was “what policy may do to offset the impact on both inflation and the real economy”, Mr Nabarro said.

Energy consultancy Cornwall Insight also hiked its estimate for gas and electricity bills, predicting the cap will hit £4,649 per year by January and £5,341 in April.

Just a week ago, Cornwall had forecast it would peak £4,427. Prices are expected to remain extremely high throughout next year dropping only slightly to £4,767 in July and £4,807 in October.

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

“Inflation at 18.6 per cent would push millions of people into dire straits,” said Sarah Coles, senior analyst at Hargreaves Lansdown.

“And because these horrible price hikes are being driven by the essentials people need to stay alive – like food and heat – it’s going to hit those on lower incomes hardest, who’ve got nothing left to give.

“Given that the price of everything else is also soaring, it’s going to be impossible for huge numbers of people to stay on top of their bills.”

Ms Coles warned that someone in the lowest 10 per cent of earners could spend 41 per cent of their total income on energy by April, assuming they were the sole earner in a household using the average amoung of energy.

Someone living entirely on the full flat rate state pension could spend 60 per cent of their income on energy by that point, if they used the same amount of energy as the average household.

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.

Cornwall Insight’s principal consultant, Craig Lowrey said that the energy crisis could not be solved with “hastily pulled together, short-term policies that yield a percentage decrease here or a few months relief there”.

He warned that such policies risk being “sticking plasters” for a much deeper and longer-term problem.

Liz Truss, who is favourite to win the leadership vote, has faced heavy criticism over reports she will bypass an independent spending watchdog when she unveils her emergency cost-of-living budget.

Senior Conservative MP Mel Stride warned the next prime minister would be “flying blind” if she sidelines the Office for Budget Responsibility (OBR) next month.

Ms Truss has said she favours tax cuts over “handouts” – an approach that many experts have said will not deal effectively with the cost-of-living crisis which is rapidly gathering pace. Gas prices are already at close to 10 times normal levels and there is 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. Electricity for the winter months in Britain is now trading at more than £600 per megawatt-hour, having risen almost 50 per cent in the past month.

Winter power prices are about 12 times higher than average power prices over the past decade

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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