UK inflation forecast to double to 18.6% as Europe's energy crisis escalates

Soaring gas prices across the region prompt fears of a recession as Britain's energy bosses call for a price-cap freeze

Britain's surging energy bills look set to continue to rise unless a freeze on the price cap is imposed, experts say. PA
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UK inflation will almost double to 18.6 per cent by the start of 2023 — its highest rate in half a century — as Europe’s energy crisis leads to British bills becoming prohibitive for many consumers, economists forecast on Monday.

As worries around Britain's surging inflation and declining economy mount, sterling fell to its lowest since mid-July against the dollar, dropping as low as $1.1785. Against a weakening euro, it held at 84.82 pence, after falling to a near four-week low against the single currency last week.

A report from Citi forecast UK Consumer Price Index inflation would reach 18.6 per cent in January, which would represent the highest rate for almost 50 years.

Last month, CPI inflation struck a 40-year high of 10.1 per cent, with the Bank of England projecting a further rise to above 13 per cent in October before a decline.

The projections came as fears of recession across Europe grew on Monday, with shares set for their worst day in more than a month as hawkish signals from the European Central Bank and a weak economic outlook weighed on investors' minds.

News that Russia will halt natural gas supplies to Europe for three days at the end of the month has also piled pressure on the continent as it seeks to refuel before winter.

Many fear that the halt could prove more than temporary, while Germany warned that Moscow could further reduce supplies and repeated a call to conserve energy.

“We have a very critical winter right in front of us,” German Economy Minister Robert Habeck told public broadcaster ZDF in Montreal, during a visit to Canada with Chancellor Olaf Scholz. “We must expect [Russian President] Putin to further reduce gas.”

Such a reduction could be enough to tip the eurozone into a recession.

"It's clear that the eurozone economy could teeter into recession this winter, dependent on whether energy stockpiles can last through the coldest months," said Jane Foley, senior forex strategist at Rabobank. "Tomorrow's August PMI data will provide a snapshot as to how the eurozone economy has been holding up recently."

While Britain is not in the eurozone, its privatised energy network leaves it particularly vulnerable to rising gas prices.

Citi forecasts that inflation will jump to 14.8 per cent in October as energy bills surge for UK households.

It said inflation would accelerate after last week's 25 per cent rise in UK gas prices and 7 per cent rise in UK electricity prices.

Citi also expects the October energy price cap to reach £3,717 ($4,391), slightly higher than previous estimates.

Another increase in energy bills in January — with projections the cap will hit £4,567 — will push inflation towards the new peak, it said.

Citi predicted that the price cap would surge to £5,816 in April.

UK energy bosses beg for state intervention

This prospect united Britain's energy bosses on Monday morning, as they issued a plea to the UK government to keep the price cap at its current level.

Greg Jackson, founder and chief executive of Octopus Energy, told the BBC the government had to help consumers because it was impossible for householders to meet rising costs on their own.

"The big thing here is we need more help for customers from the government," he said.

"The reality is customers are being asked to pay the price of gas, which is weaponised by Putin, and they shouldn’t be expected to do that alone.

Let’s put it in perspective. The UK’s energy bill is going from maybe £15bn in a normal year to £75bn this year. And that’s the equivalent of maybe 9p or more on the base rate of income tax. No government would announce that, and in the same way, no government should let this go to customers."

He contextualised the extraordinary rise using the price of a pint of beer, which he said would be £25 if wholesale prices were to rise a similar amount in that sector.

Dale Vince, founder of Ecotricity, agreed and said there was "systemic failure in the energy market".

"The government simply needs to step in and pick up this cost like they did in the pandemic," he said. "We need £40bn to get through this winter.

"That’s 10 per cent of what was spent during the pandemic and that’s the only thing that will really sort this problem out.

Mr Jackson said one option for the government would be to freeze the energy price cap and use a tariff deficit fund to help energy companies cover their costs.

Mr Vince voiced his support for the idea and Bill Bullen, chief executive of Utilita, said the Conservative party should bring forward the end date for the leadership contest so the new leader could cancel the rise in the energy price cap being announced on Friday.

"This cannot wait until the September 5 or 6," he said. "The Conservative party needs to sort themselves out, decide who the leader is going to be this week, so that the Ofgem announcement on the 26th [the rise in the price cap for October] doesn’t have to happen. That is such an imperative."

Updated: August 22, 2022, 3:55 PM