Citigroup warns that Inflation could almost double to 18.6pc over the next few months, as energy prices rise.
The bank stated that gas prices rose by 25% last week. This would cause inflation at rates not seen since 1970.
According to Citigroup, this will force the Bank of England to raise the interest rate to 7pc if there is widespread demand for higher wages.
According to the company, the average household energy bill will reach £3,717 per year in October. It will then rise to £4,567 by January 2023 and £5,816 by April.
As measured by the consumer price index (CPI), this will increase inflation from 10.1pc to 18.6pc between July and January.
This would be the highest rate since 1976 when the sterling crisis forced the government into a bailout deal with the International Monetary Fund.
Citigroup expects that the retail prices index (RPI), which is not a statistical indicator, will reach 21.4pc next year. It is linked to increases in rail fares and air passenger duty as well as about 25% of UK government debt interest.
Citi economist Benjamin Nabarro said that higher inflation would make the Bank of England more aggressive.
Citigroup expects inflation to remain at or above the Bank of England target of 2pc until 2024.
“Inflation is now expected to rise significantly higher than the 13pc forecast for August,” stated Mr Nabarro. This means that rates must be brought down to a restrictive level quickly.
Citi anticipates that higher prices will lead to an increase in unemployment. However, Mr Nabarro stated: “Should there be signs of embedded inflation, we believe a Bank Rate of 6-7pc is necessary to keep inflation dynamics under control.”
The Nordstream 1 pipeline carries gas from Russia to Germany. A continued heatwave and intermittent supply have led to a drop in supplies and high prices. Last week, electricity prices rose 7%.
Rishi Sunak and Liz Truss, Tory rivals in leadership, have promised to provide more financial support for struggling households this Winter.
Mr Nabarro stated that calls for more assistance were “deafeningly increasing by the day”, and added that the Government would need to provide at most £40bn in additional financial aid.
This package is nearly triple that of the one announced by Mr Sunak, former chancellor. It will reduce £400 on all energy bills for winter and offer additional support to those who are most in need.
“In reality, any government response to these is likely to require substantially more fiscal firepower. Citi stated that to offset the full energy rise in full, it would take approximately £30bn (or 1.4pc) of the gross domestic product.
Investec stated last week that it would cost £62bn to protect households from the full rise in energy prices this winter and autumn.
Mr Nabarro stated that Truss’s comments do not provide a significant offset to headline inflation. Although the risk remains skewed toward further support,
The ONS (Office for National Statistics) has revealed that the economy is less than anticipated due to the larger impact of Covid 2020. Officials now believe that the GDP fell by 1% in the past year. This is a greater drop than the 9.3pc recorded earlier.
This is partly because inflation was not fully understood. The NHS’s huge spending on healthcare did not reach its goals due to rising prices. Retailers also sold fewer goods than their customers’ high spending.
However, the manufacturers’ output grew rather than plummeting by 8.7pc, as initially thought. Officials discovered a sudden sharp drop in prices for some components used in factories.
