UK inflation to peak at 18% in 2023

Economist at US bank Citi has predicted that British consumer price inflation is set to peak at 18 per cent – nine times the Bank of England’s target – in early 2023 in the light of the latest jump in energy prices.

UK’s consumer inflation was last above 18 per cent in 1976.

With inflation now set to peak substantially higher than the Bank of England’s 13 per cent forecast in August, its Monetary Policy Committee was likely to conclude that the risks of more persistent inflation have intensified, Benjamin Nabarro said in a note.

According to him, the question now is what policy may do to offset the impact on both inflation and the real economy.

The front-runner to become Britain’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, Nabarro said.

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

“Should signs of more embedded inflation emerge, we think a Bank Rate of 6-7 per cent 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,” he added.

The BoE announced a rare half percentage-point interest rate increase earlier this month and investors expected another big move when the MPC makes its next scheduled monetary policy announcement on 15 September.

Nabarro said he expected Britain’s retail price index – which is used to set the return on inflation-linked bonds – would peak at over 20 per cent.

It would be recalled that the Covid-19 pandemic led to the sharpest fall in UK output in over 300 years in 2020, causing it to decline more than any other major economy, according to updated official figures.

A report by the Office for National Statistics (ONS) showed gross domestic product (GDP) declined by 11 per cent in 2020.

According to historical data hosted by the Bank of England (BoE), this was a larger drop than any of the ONS’s previous estimates and the largest since the ‘Great Frost’ of 1709.

Though there was a sharp rebound in the British economy last year and it recovered to its pre-pandemic size by November 2021, fast-rising inflation has led to a warning from the BoE that the economy is likely to slip into recession later this year.

However, the ONS cautioned against direct comparisons with other countries as most, except for the US, have not yet undertaken the same kind of comprehensive revisions as Britain.