Inflation could hit 18% in 2023, leading bank warns

Inflation in the UK could peak at 18.3% in January, a bank has warned, which is far higher than the current Bank of England (BoE) estimate.

US-based Citi bank raised its forecasts from previous estimates after the latest jump in energy prices.

"The question now is what policy may do to offset the impact on both inflation and the real economy," forecaster Benjamin Nabarro said in a note to clients.

Consumer price inflation was last above 18% in 1976.

Inflation is currently at 10.1% and the BoE said last month it would peak at 13% early next year, which was already significantly higher than its estimates from the spring.

The main driver of Citi's prediction is spiralling energy prices, with the latest prediction saying they could hit as high as £5,300 a year by next April.Ofgem will be announcing the next hike on Friday and it is predicted to almost double to around £3,700.

With inflation now set to peak substantially higher, the BoE's Monetary Policy Committee was likely to conclude that the risks of more persistent inflation had intensified, Citi said."This means getting rates well into restrictive territory, and quickly," Nabarro said.

"Should signs of more embedded inflation emerge, we think Bank Rate of 6-7% will be required to bring inflation dynamics under control. For now though, we continue to think evidence for such effects are limited."

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The BoE announced a rare half-percentage-point interest rate increase earlier this month to 1.75%.

Entrenched inflation would be extremely difficult for the government to handle, with almost all current policies assuming the crisis will begin to ease by the middle of next year.

The BoE believe it will get near its 2% inflation target towards the end of next year.

Although increasing interest rates is generally accepted to help reduce inflation, it will increase costs for millions of mortgage holders who will already be struggling with the cost of living.