Inflation in the UK is on track to reach 18.6% in January 2023, the highest peak for half a century, according to a new forecast by Citigroup.

The investment bank attributed the record-breaking consumer price index (CPI) inflation growth to soaring wholesale gas prices. The Financial Times reported. 

It said that the country’s retail energy price cap, which limits how much households pay for heating and electricity on an annual basis, will be raised to £4,567 (AED19,756) in January 2023 and £5,816 in April 2023, up from the current level of £1,971, the report said.  

The resulting impact of the price increases will lead to inflation “entering the stratosphere” the bank said.

Chief economist Benjain Nabarro said the peak will be higher than the second Opec oil shock of 1979 when the CPI reached 17.8%, according to estimates from the Office of the National Statistics.

Inflation at that level will squeeze household incomes already impacted by rising food, energy and petrol prices and further push the UK economy into recession but will also push the Bank of England (BoE) to tighten monetary policy further, Nabarro said.

While the BoE said earlier this month that it expects UK inflation to reach 13% by October, Goldman Sachs and EY have forecasted inflation of 15% by the start of next year, which is still far more than the BoE target of 2%.

UK and European wholesale natural gas prices are already trading at close to 10 times normal levels and other forecasters have also raised their inflation predictions.

“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.

(Writing by Imogen Lillywhite; editing by  Seban Scaria)

imogen.lillywhite@lseg.com