Inflation will hit a record high and smash the Bank of England’s expectations this year, according to bets laid by City analysts.
The UK’s mainstream measure of inflation will accelerate to a peak of 6.8 per cent this April, propelled higher by swelling energy bills, investment banking giant Goldman Sachs warned yesterday.
However, the cost of living will climb above Goldman’s predictions if the Omicron strain solidifies the global supply crunch, potentially igniting a series of rate hikes from the Bank.
“If Omicron is seen as net inflationary… then there is the risk of” interest rates hitting “one per cent by the May [monetary policy committee] meeting,” Goldman said.
The last time UK interest rates were that high was February 2009 in the immediate aftermath of the financial crisis.
If Goldman’s predictions materialise, it will continue a trend of the Bank consistently undershooting its inflation forecasts since the onset of the Covid-19 crisis.
Threadneedle Street thinks the cost of living will peak at six per cent this spring.
The Bank’s reluctance to tackle inflation head on prompted a former rate setter to warn the central bank will need to hoist rates quicker to tamp down on the raging cost of living.
The Bank “is clearly behind the curve in responding to this inflation surge,” Andrew Sentance, a former member of Threadneedle Street’s monetary policy committee, told City A.M..
“The MPC will be in catch-up mode in 2022. Interest rates are likely to end this year at 1-1.5 per cent but further rate rises will be needed to keep inflation in check,” he added.
The MPC will announce its next rate decision on February 3.
The consumer price index, the UK’s mainstream measure of inflation, has never risen above 5.2 per cent, according to Office for National Statistics records dating back to 1998.
A combination of sky-high wholesale gas prices, supply chain disruptions and roaring demand driven by consumers splashing the cash after the Covid-19 unlocking will push inflation higher in 2022, Goldman said.
Households are set to be stung in April when the blizzard of inflation headwinds culminate, spearheaded by a possible 50 per cent rise in the energy price cap to account for historically high wholesale gas prices.