Cost of living crisis: inflation to hit 22% in 2023 due to sky-rocketing energy prices, Goldman Sachs predicts
Goldman Sachs has warned that inflation could hit 22.4% next year due to sky-rocketing natural gas prices.
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This is the highest predicted inflation rate for 2023 by a major financial institution, after Citi group recently predicted it would hit 18.6%.
Inflation has already hit 10%, which is the highest inflation rate in the developed world, and could peak at 22.4% if the Ofgem price cap rises by 80% in January, Goldman Sachs said.
The forecast is based on record natural gas prices, which have risen by 90% this month, the Times reported.
Sven Jari Stehn, chief European economist at Goldman, said: “Wholesale gas prices in the UK have surged by 145% since the start of July, and while our commodity strategists do not expect the recent spike in European gas prices to persist, we view persistently higher gas prices as an upside risk to our forecast for the Ofgem price cap increase in January.”
If inflation hit 22% this would cripple UK households during a recession and lead the economy to shrink by 3.4% over the next year, Goldman added.
On Friday, the energy price cap was raised by 80% for which meant the average annual energy bill will reach more than £3,500 in 1 October.
Analyst Cornwall Insight has predicted this will hit £5,386 in January and £6,616 in April.
Bank of England data showed credit card borrowing was 13% higher in July than in 2022, the biggest jump since October 2005.
This shows that Brits are struggling with the soaring cost of living, and wages are struggling to keep up with inflation.
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.
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.