UK inflation to return to 2% by autumn, Citigroup forecasts

Citigroup has forecast that UK inflation will plunge from double-digit rates to close to 2 per cent by the end of this year as rapid falls in gas prices give Rishi Sunak’s government hope of solving some of its biggest economic challenges.

Citi said on Wednesday that consumer price inflation was likely to fall to 2.3 per cent in November, well below the Bank of England’s forecast that it would remain around 4 per cent in the fourth quarter of the year.

The new projections provide a fillip for the UK prime minister, potentially making it easier to resolve public sector strikes over pay and to fulfil his pledge of halving inflation by the end of the year. The inflation rate in January was 10.1 per cent.

“The faster reduction in inflation [this year] primarily reflects an easing in pricing pressures, particularly in energy,” said Benjamin Nabarro, Citi’s chief UK economist. He now expects UK headline inflation to slow to below 5 per cent from July. Only a month ago he expected that to happen in October.

Citi’s new forecasts reflect a likely fall in household energy bills as wholesale gas prices continue to drop. The price of UK gas for delivery in September has halved in the past two months from £2.60 a therm to £1.26 a therm and fallen more than 80 per cent since its peak last August.

These falls will translate into a lower energy price cap in the fourth quarter of this year from £3,295 for a household with average consumption of gas and electricity to £2,161, according to the latest forecasts from consultancy Cornwall Insight.

The reduction in energy prices will in turn pull down inflation, as the cap is forecast to be lower than that imposed by the energy price guarantee of £2,500 for the fourth quarter of 2022.

The rapid decline in inflation will be accentuated by the Office for National Statistics raising the weighting for gas and electricity in the consumer price index this year from 3.6 per cent of household spending to 4.8 per cent. As energy prices fall, the higher weighting of gas and electricity in the index will pull the overall rate of inflation down faster.

In a further potential boost to the public finances, Nabarro forecast that retail price index inflation, which is used to uprate £560bn of inflation-linked government debt, is also likely to fall rapidly, limiting the cost of servicing this debt.

He expects the RPI measure of inflation to drop from the current rate of 13.4 per cent to 4.3 per cent in the fourth quarter of this year, well below the Office for Budget Responsibility’s November forecast of 6.3 per cent towards the end of 2023.

That would provide further relief to the government on the costs of servicing debt in an area where the UK has been more exposed than other countries because it has a larger share of its debt linked to inflation.

The average forecast of CPI inflation in the fourth quarter among economists polled by the Treasury this month stood at 4.5 per cent, down from 5 per cent in the poll carried out in January. The RPI forecast for the same period stood at 6 per cent, down from 6.8 per cent forecast a month earlier.