Inflation to hit 18% in January as fears grow over worsening cost of living crisis

22 August 2022, 13:28

Inflation is set to hit 18% in January as fears grow that the cost of living crisis will worsen.

Forecasters believe the sharp rise will peak at 18% - nine times the Bank of England's target in early 2023 - an economist at US bank Citi said.

The jump in forecasts is a result of the latest jump in energy prices.

Spiralling energy bills are set to cripple families over winter, with the government being warned that extra support will be needed for Brits in coming months.

Boris Johnson is set to use his final fortnight in office to highlight measures to address the crisis.

A spokeswoman said the government is "focused on supporting people with the cost of living and making sure that those who are eligible for the £37 billion of support that's already available through our phased-in plan are availing themselves of it."

But no more help is expected to be announced before the new prime minister takes office, with major policy decisions postponed until that point.

It comes after the Bank of England announced a half percentage-point interest rate increase earlier in the month.

Another big move is expected to be on the way when the Monetary Policy Committee (MPC) makes its next scheduled policy announcement on September 15.

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

With inflation on track to reach new highs, the risks of more persistent inflation have also intensified, he said.

"This means getting rates well into restrictive territory, and quickly.

"Should signs of more embedded inflation emerge, we think Bank Rate of 6-7% will be required to bring inflation dynamics under control.

Mr Nabarro also said that Tory leadership frontrunner Liz Truss is expected to set out support measures to help households.

He added: "For now though, we continue to think evidence for such effects are limited with increases in unemployment still more likely to allow the MPC to pause around the turn of the year."

Consumer price inflation was last above 18% in 1976.

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Plans are already in place to help people save cash if they avoid high-power activities, such as cooking or using washing machines, when demand is high.

Households with smart meters could earn as much as £6 per kWh saved, potentially adding up to hundreds of pounds a year.

The National Grid Electricity System Operator is to apply to energy regulator Ofgem and hopes it will be able to start the scheme from by the end of October.

"We are developing a new service that will be available for consumers to benefit from across this winter and will be announcing further information soon," a spokesperson for the operator told the Sunday Times.