UK Inflation to Hit Over 18% Next Year - Citi

Citi analyst Benjamin Nabarro said in a note to investors Monday morning that they expect UK inflation to hit 18% in the first quarter of 2021.

The analyst said in light of recent developments, they have updated their inflation profiles based on the assumption of a £300 policy offset applied to household energy bills from October through to 2024.

"We now expect CPI and RPI inflation to breach 18% and 21% respectively in Q1-23," wrote Nabarro. "The Ofgem news this week provides the first notable touchpoint in the run up to the winter – we expect a cap of £3,717 to be announced (ex. support). More notable, in our view, will be any guidance on increases in January and April – for now these look set to be substantially greater.

UK inflation hit 10.1% in July, five times the Bank of England's target. If inflation did hit 18%, it would be the highest in the UK since 1976.

Nabarro said it is entering the "stratosphere" and said the question now is what policy may do to offset the impact on inflation and the real economy, while they believe Truss's comments "point to only a limited offset for headline inflation. Though the risks remain skewed towards further support."

"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%," added the analyst.

By Sam Boughedda

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