Britain’s inflation rate could soar to 18.6% early next year, with the Bank of England having to raise interest rates as high as 7%, an analyst from investment bank Citi has warned.
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Benjamin Nabarro, chief UK economist at Citi (NYSE:C), updated his forecasts after a 25% rally in gas prices last week.
The last time British inflation hit such heights was in 1976, after an oil supply shock left Britain seeking a bailout from the International Monetary Fund.
Inflation to peak in January
Nabarro forecast that the retail energy price cap will peak at £5,816 in April.
Nabarro wrote in a note to clients, ‘The question now is what policy may do to offset the impact on both inflation and the real economy.
‘This means getting rates well into restrictive territory, and quickly.
‘Should signs of more embedded inflation emerge, we think Bank Rate of 6 to 7 per cent will be required to bring inflation dynamics under control.
‘For now though, we continue to think evidence for such effects are limited with increases in unemployment still more likely to allow the MPC to pause around the turn of the year.’
Wages falling as inflation rises
British consumer price inflation rose to 10.1% in July, up from 9.4% in June, in the highest figure since February 1982, according to the Office of National Statistics.
The increase was higher than had been predicted in a poll of economists by news agency Reuters.
On Tuesday, ONS data showed that underlying real wages had fallen by 3%, the sharpest drop since records began in 2001.
Earlier this week experts predicted that the Bank of England would raise interest rates by another 0.5% next month as it battles to control soaring inflation, experts have warned.
In a poll of economists by news agency Reuters, 30 out of 51 forecast that the Bank would raise interest rates by 50 basis points to 2.25% in September.
Another 21 economists suggested that the bank would raise interest rates by 0.25% in September – after a 0.5% raise in August.
In recent weeks, British companies pared back profits and earnings forecasts as consumers tightened their belts, with delivery unicorn Deliveroo (GB:ROO) cutting its revenue guidance. As consumers shun big-ticket purchases, furniture retailer Made.com (GB:MADE) also slashed its earnings and sales forecasts for the coming months.
