Cost of living crisis: UK inflation forecast to hit 18.6% in January, according to Citi group report

This would be the highest inflation rate for more than half a century, and the second highest Britain has faced apart from during major wars.

UK inflation is forecast to hit 18.6% in January, according to a new report from Citi group.

This would be the highest inflation rate for more than half a century because of sky-rocketing wholesale gas prices, and the second highest Britain has faced apart from during major wars.

The Financial Times reported that the investment bank has predicted the energy price cap will be raised to £4,567 in January and £5,816 in April. It is currently at £1,971.

What is inflation forecast to reach in January?

Benjamin Nabarro, chief UK economist at Citi, said: “We now expect CPI inflation to peak at over 18% in January.”

This would squeeze household incomes hard and further push the UK economy into recession, Nabarro said.

Citi’s new forecasts have taken account of a 25% increase in wholesale gas prices and a 7% rise in wholesale electricity prices.

UK and European wholesale natural gas prices are already trading at close to 10 times normal levels.

“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,” Nabarro said.

Other banks expect inflation to hit at least 15%, while the Bank of England has forecast it will exceed 13%.

The ONS said it stood at 10.1% in July, as price rises spread throughout the economy, the highest level in more than 40 years and the highest rate among G7 countries.

Energy regulator Ofgem is set to announce the latest price cap on Friday, with predictions it could rise from £1,971 to around £3,600.

Loading....

What is inflation?

These price hikes are driven by many different factors, like the price of oil, supply chain disruption or the scarcity of a particular product - i.e. whatever affects the cost of getting products from where they are produced to the consumer.

For example, the cost of whole and low-fat milk rose 28.1% and 34% respectively in the year to July 2022.

This hike has come as an indirect result of Russia’s invasion of Ukraine.

Both countries are key suppliers of the grains and oilseeds used to feed cows, the fertiliser used to grow the grass that also feeds cattle, and the fuel that keeps tractors moving and powers milk processing facilities.

Loading....

Given the conflict has either jeopardised or halted the supply of these commodities from both countries, global markets have seen price spikes for them.

Sharp rises in inflation, like the one seen for milk, can severely impact the cost of living and see consumers opt to reduce their spend on more luxury goods and services to focus on life’s necessities.

Overall, this is bad news for the economy.

But gradual inflation is seen by some economists as a good thing.

They believe it encourages shoppers to spend rather than run the risk of seeing the value of their money decrease.

Tory leadership candidates Rishi Sunak and Liz Truss have very different plans on how to tackle the cost of living crisis. Credit: Getty Images

What are the Conservative leadership candidates’ policies on inflation and the cost of living crisis?

The Tory leadership contest frontrunner Liz Truss has said she would bring forward urgent plans to address rising energy bills if elected prime minister.

She has argued that tax cuts will help to grow the UK’s economy and boost prosperity.

A Truss campaign spokesman said: “The cost-of-living crisis means immediate action is required.

“A Truss government would seek to act as soon as possible to help people across the UK, by cutting taxes and introducing a temporary moratorium on energy levies.”

While Rishi Sunak attacked his opponent’s tax-cutting plans, as the race to succeed Boris Johnson enters its final fortnight.

The former chancellor’s campaign called on Ms Truss to “come clean”, and claimed her plans to borrow in order to fund tax cuts were “dangerous”.

Senior Tories have criticised the Foreign Secretary’s economic plans, with former minister Michael Gove accusing her in a Times article of taking a “holiday from reality”.

As both Ms Truss and Mr Sunak have come under increasing pressure to deal with rising costs, she has signalled she could help firms and households with soaring energy bills with direct support this winter.

Mr Sunak has committed to removing the 5% VAT on household energy bills for 12 months from October, and also committed to giving households more money through emergency support payments.

An energy company boss called on the Conservatives to end the leadership contest early to address rising bills.

Bill Bullen, chief executive of Utilita, told BBC Radio 4’s Today programme: “All through the summer, we’ve been hearing about customers in distress, customers who are worried that they’re not able to heat their homes over this coming winter.

“That’s why we’re saying to the Government, you’ve got to take this decision to freeze prices at their current level right now.

“This cannot wait until the 5th or 6th of September. The Conservative Party needs to sort themselves out, decide who the leader is going to be this week, so that the Ofgem announcement on the 26th doesn’t have to happen.”