UK inflation to hit 18% as energy bills rocket, warns Citi – business live | Business

Surging energy bills will drive UK inflation over 18% early next year — the highest peak in almost half a century — investment bank Citi has warned.

Citi has forecast that CPI inflation will hit 18.6% in January 2023, while the RPI inflation rate will hit 21%, due to extremely painful rises in energy bills that will push the cost of living into the “stratosphere”.

Citi predicts that the price cap on energy bills across Great Britain will rise to £3,717 in October (up from £1,971 today), and then jump to £4,567 in January and then £5,816 in April.

Benjamin Nabarro, chief UK economist at Citi, told clients:

Our latest estimate, updated for the further 25% and 7% rally in UK gas and electricity prices last week, points to a further upside shift in UK inflation.

Accounting for these developments, as well as updating our own weights for CPI/ RPI and honing our own accounting for curve backwardation, we now expect CPI inflation to peak at over 18% in January. RPI inflation, we think, will peak at over 20%.

CPI inflation jumped to 10.1% in July, a 40-year high.

The question now is what policy may do to offset the impact on both inflation and the real economy, Nabarro adds:

For now, we think [Liz] Truss’s comments point to only a limited offset for headline inflation. Though the risks remain skewed towards further support.

Earlier this month the Bank of England forecast that UK inflation will peak over 13% this autumn when the energy price cap is lifted.

Wholesale gas prices have continued to rise through August, as Vladimir Putin has ‘weaponised’ Russia’s energy supplies.

As flagged earlier, they’ve surged this morning as Gazprom prepares to shut down its Nord Stream 1 pipeline for three days at the end of this month.

The FT points out that if UK inflation hits 18%, that would be higher than the peak of inflation after the second Opec oil shock of 1979 when CPI reached 17.8%, according to estimates from the Office for National Statistics.

One group of workers has managed to get an inflation-beating increase in earnings – Britain’s CEOs.

Chief executives of the UK’s 100 biggest companies have seen their pay jump by 39% to an average of £3.4m, according to research by the High Pay Centre thinktank and the Trades Union Congress (TUC).

The median average pay of CEOs of companies in the FTSE 100 index rose to £3.4m in 2021, compared with £2.5m in 2020 during the height of the coronavirus pandemic when many bosses took a voluntary pay cut as they placed millions of employees on furlough.

CEO pay has also surpassed the £3.25m median recorded in 2019, before the pandemic.

Here’s the full story, by our wealth correspondent Rupert Neate:

If beer prices had risen as fast as gas prices this year, then a pint of beer would cost £25, the head of supplier Octopus Energy points out.

Greg Jackson, founder and chief executive of Octopus, told Radio 4’s Today Programme that gas prices are currently nine to 11 times higher than usual.

“Look, to put that in perspective, if this was beer, we’re talking about the wholesale price being £25 a pint.

“People don’t know what a therm is, but, underneath it, the price per therm has gone from 60p to around £5 at the moment and that’s what’s passing through to customers if we don’t do something.”

Jackson added that there are systemic issues within the energy industry, but that energy suppliers can’t be expected to pass such high wholesale costs onto consumers.

Energy regulator Ofgem is due to announce the UK’s energy price cap on Friday. Bills could soar around 80% from October, to £3,600 per year from £1,971 at present.

Jackson warned that the UK’s energy bill is rising from £15bn in a normal year to £75bn this year – the equivalent of an extra 9p on the base rate income tax.

He says the government must increase its existing support package – one option would be to create a ‘tariff deficit fund’, which would freeze the cap where it is, and repay the cost when wholesale prices return to normal levels.

UK wholesale gas prices have surged this morning, after Russia announced it will halt supplies through its main pipeline to Europe for three days at the end of the month.

The price of gas for delivery to the UK next month has risen almost 20% to 550p per therm.

That’s its highest since early March after the Ukraine war began.

The day-ahead UK gas price has jumped 27% to 460p per therm.

European gas prices have risen too, with the benchmark September contract up 5%, and the October contract jumping 10%.

The move comes after Gazprom said on Friday it would conduct unscheduled maintenance on a Nord Stream 1 turbine, which pumps gas under the Baltic Sea to Germany.

The move deepens an energy standoff between Moscow and Brussels, at a time when European countries are trying to build up stockpiles for the winter.

Analyst Nathan Piper of Investec says concerns over gas supplies are rising, pushing up prices:

Gazprom announced an unplanned maintenance of a Nordstream 1 turbine. Gas supplies via the pipeline will be shut off for at least three days starting end August.

Russian gas supplies to Europe were already down 75% year on year and this announcement has pushed UK/European gas prices to all-time highs (10x the 10-year average) for five consecutive days.

We anticipate a further surge in spot prices and the forward curve as uncertainties around gas supply increase ahead of winter, when gas demand rises for heating.