We are all getting used to the spectre of rising prices, but one recent forecast stopped even the pessimistic in their tracks. Economists at Citi believe that inflation will reach 18.6 per cent early next year, as the continued war in Ukraine pushes up energy prices1.1
That’s much higher than recent forecasts from the Bank of England, which predicted 13 per cent inflation2. It is a level of inflation not seen since 19763, when it was coming down from highs of 25 per cent in 1975.
It is a scary thought, but not everyone agrees that it will be this high, with Handelsbanken economist James Sproule saying that it might be “a pessimistic step too far”.4
For savers and investors, the continuing rise in prices will have a number of effects. These are likely to include:
Higher interest rates
Citi economists warn that Bank Rate may need to rise to seven per cent to get inflation back under control. At present, the market is expecting a rise to four per cent in May next year.5
Those on mortgages that are not fixed will see their monthly mortgage payments rise too, while those whose fixed-rate deals are soon to expire will have to accept the reality of higher monthly payments.
Savings rates are likely to rise however, although they are unlikely to manage to keep pace with rising inflation, meaning that money in the bank will continue to lose its value. Shopping around for the best rates on savings will continue to be important.
Increasing energy caps
Ofgem, the energy regulator which caps the cost that consumers pay for their gas and electricity, will announce higher energy caps because of higher gas and electricity prices, which will contribute to rising bills.
These cap changes will now take place every three months, rather than every six, meaning that prices could go up in January, March and June. However, if wholesale prices fall, the argument is that the cap could be reduced more quickly, too.
With the leadership of the Conservative Party still in doubt, it is not clear what proposals will be put in to help customers with their energy costs this winter, but there may be some plans such as the removal of VAT on energy, that would bring down personal inflation a little.
Higher prices for staples
While most of us know that energy prices are rising, not everyone realises that this will cause other things to go up in price as well. Energy is needed for manufacturing and transporting goods, which will push up the prices of these items too.
This in turn creates higher inflation.
Where will it end?
Times of high inflation do come to an end, but the questions are when and why. The Bank of England believes prices will start to fall next year and be close to its target of two per cent in about two years’ time.6
Inflation is likely to fall once there is a lessened demand for goods and services due to reduced economic activity (ie a recession), which will cause a fall in oil prices.
The most recent consensus figures published by the Government show that, on average, experts believe that CPI inflation will still be over three per cent in Quarter 4 of 2023.7
By that time, though, it is likely that many people will be struggling financially, because of the price rises on everyday items.
2nd September 2022
1 https://www.ft.com/content/778e65e1-6ec5-4fd7-98d5-9d701eb29567
2 https://www.theguardian.com/business/2022/aug/04/bank-of-england-raises-interest-rates-to-1-point-75-per-cent-in-biggest-hike-in-27-years
3 https://www.theguardian.com/business/2022/aug/22/uk-inflation-will-hit-18-per-cent-in-early-2023-says-leading-bank-citi-gas-electricity
4 https://www.thisismoney.co.uk/money/markets/article-11134163/UK-inflation-set-peak-18-early-2023-warns-Citi.html
5 https://www.theguardian.com/business/2022/aug/23/bank-of-england-may-be-forced-to-raise-interest-rates-to-4-per-cent-2023-inflation
6 https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising
7 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1092359/Forecomp_July_2022.pdf