Analysts at investment bank Citi predict another rise in gas prices last week will push the rate of inflation much higher than even the Bank of England had predicted. Based on the latest market prices for natural gas, Citi now expects energy regulator Ofgem’s price cap to reach £4,567 in January and then £5,816 in April, compared to the current level of £1,971 annually. That would lead to inflation “entering the stratosphere” and peaking higher than even after the 1979 oil crisis, the bank said in a note. “We now expect CPI inflation to peak above 18 percent in January,” said Benjamin Nabarro, chief UK economist at Citi. Energy consultancy Cornwall Insight has also raised its estimate for gas and electricity bills, predicting the cap will reach £4,649 a year by January and £5,341 in April. Just a week ago, Cornwall predicted it would peak at £4,427. Prices are expected to remain extremely high throughout next year, falling only slightly to £4,767 in July and £4,807 in October. Such massive price increases would hit UK household incomes and likely push the British economy deeper into recession. “Inflation at 18.6 percent would push millions of people into dire straits,” said Sarah Coles, senior analyst at Hargreaves Lansdown. “And because these horrendous price increases are driven by the basics people need to stay alive – like food and heat – it will hit those on lower incomes, who have nothing to give, the hardest. “Since everyone else’s price is also skyrocketing, it will be impossible for huge numbers of people to stay on top of their bills.” Ms Coles warned that someone in the bottom 10 per cent of incomes could spend 41 per cent of their total income on energy by April, assuming they were the sole earner in a household using the average amount of energy. Someone living entirely on the full state pension could spend 60 per cent of their income on energy by that point if they used the same amount of energy as the average household. Consultancy firm EY and investment bank Goldman Sachs predict inflation will top 15% early next year, while the Bank of England said this month that inflation will reach 13.4% in the final quarter of 2022. The dire forecasts are intensifying pressure on the government to provide further financial support to consumers facing unaffordable bills. But ministers have so far refused to offer additional help as the Tory party awaits a vote on who will lead the country after Boris Johnson steps down as prime minister. Liz Truss, who is favorite to win the leadership vote, has faced intense criticism over reports she will bypass an independent spending watchdog when she unveils her emergency budget. A senior Conservative MP has warned that the next prime minister will be “blindsided” if he ditches the Office for Budget Responsibility (OBR) next month. Ms Truss said she favored tax cuts over “handouts” – an approach many experts said would not effectively tackle the accelerating cost of living crisis, with gas prices already at almost 10 times normal levels and no sign that things will ease up before winter. Wholesale gas prices rose 25 percent last week alone, and electricity rose 7 percent. In Germany, Europe’s economic powerhouse, industry faces a three-day week as supplies are rationed. Natural gas flows from Russia, which supplied a third of the continents with just over ethane gas a year ago, have fallen to 10% of their previous level, raising the prospect of blackouts and widespread rationing during the colder months. On Friday, Ofgem will announce the price cap for October to January, which is expected to be close to £3,600 a year for an average household. The cap is based on recent wholesale energy costs, which, according to Citi, show the cap will rise to £3,717 before rising “significantly” next year. “Even with the economy easing, last week’s data confirmed that the ongoing risk of a shift from inflation to wage and domestic price determination could accelerate,” Mr Nabarro said. Government action to freeze gas prices – as other countries in Europe have done – would reduce peak inflation. Without further action, the Bank of England will have no choice but to raise interest rates aggressively in an attempt to bring inflation under control.
