UK Inflation Forecasts: "The Worst is Yet to Come" as some Economists Warn of 8.0% Peak

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Most economic forecasters say further price rises are in store for the UK, with most seeing a peak in the current inflationary cycle in April, when the energy bill cap is lifted and the government hikes taxes on employees and employers.

Inflation for January read at 5.5% year-on-year in January said the ONS, a tick higher than December's 5.4% and the market's consensus expectation of 5.4.

This is the highest inflation reading for 30 years and underscores the potential for further interest rate rises at the Bank of England over coming months.

The Bank of England's own forecast for annual inflation in the first quarter of 2022 shows a peak of 5.73%, not much higher than the January figure.

In the wake of the January data the National Institute of Economic and Social Research (NIESR) have raised their forecast for inflation to a likely peak at 7% during the second quarter of 2022.

"We expect the Bank of England to continue to raise interest rates in 2022 which will bring the official headline number down close to 5 per cent by the end of the year," says Janine Boshoff, an economist at NIESR.

Above: Annual CPIH inflation rate highest since May 1992. CPIH, OOH component and CPI 12-month inflation rates for the last 10 years, UK, January 2012 to January 2022.

Independent research consultancy Capital Economics now thinks CPI inflation will rise to a peak of 7.9% in April, up from a previous forecast of 7.6%.

"We think the outlook for consumer price inflation will prompt the Bank of England to raise interest rates further than most analysts are expecting," says Paul Dales, Chief UK Economist at Capital Economics.

Capital Economics see a peak Bank Rate at 2.0% in 2023.

Kallum Pickering, Senior Economist at Berenberg Bank, says UK inflation is set to rise further and the risks remain tilted to the upside.

"Surging producer prices driven by global supply shortages and robust demand growth, as well as rising energy costs, have not yet fully passed through into consumer prices," says Pickering. "The peak and length of the current inflation surge remains highly uncertain".

Berenberg expects the annual rate to peak at c7% in April when the household energy price cap is increased again in response to rising global wholesale energy prices.

Easing global supply pressures and a more sustainable pace of demand from this point should then allow inflation to moderate towards 3% by year end.

Above image courtesy of ING.

Pantheon Macroeconomics says CPI inflation looks set to jump to about 6% in February, as retailers continue to pass on higher producer prices to consumers.

"The headline rate likely will shoot up to between 7.5% and 8.0% in April," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, who was ranked the top forecaster for the UK economy in 2021 by Reuters.

"Services inflation will rise further in April, when the rate of VAT paid by hospitality and tourism business will return to 20%, from 12.5% currently, and all employers will pay more in National Insurance contributions," says Tombs.

Wealth management group Kingswood says inflation will head higher still over coming months, likely peaking at around 7.5% in April when the increase in the energy price cap feeds through.

"Today’s data leave a further 0.25% rate hike in March looking all but a done deal,” says Rupert Thompson, Chief Investment Officer at Kingswood.

Philip Shaw, an economist at Investec, says the January outturn helps to confirm the picture of inflation staying above the 2.0% target "for the next two years or so".

"Given the tightness of the labour market, this would risk a firm upward response in pay awards, prompting the Bank of England to apply the monetary brakes somewhat harder," says Shaw.

Above image sourced Gov.uk

But Investec says putting an exact figure on the inflation peak is difficult: the ONS stated that details of the treatment of the government's Energy Bill Rebate scheme - an attempt at alleviating pressure on households - would be provided as and when information "becomes available".

"A critical factor concerns the timing of the application of the £200 discount in the CPI figures," says Shaw.

It is possible that it is included in October, when the discount is applied, or alternatively in April, which is the billing month for the rise in the cap.

"If it is the former, our projections suggest that inflation will peak at 7.3% in April. If the latter, then the top may be contained a touch below 7.0% (again in April)," says Shaw.

Economists at ING Bank now expect headline inflation to peak slightly above 7% in April, which is when the recently-announced 53% increase in household energy bills will come through.

"Even with a £200 one-off reduction in average family bills, current gas and electricity futures still point to another modest increase in the energy cap in October," says James Smith, Developed Markets Economist at ING.

The result, says Smith, is that headline inflation is likely to stay above 4% through to the end of 2022, before decelerating dramatically in 2023 when those energy effects filter out.

Pantheon Macroeconomics forecasts CPI inflation to fall back steadily from April, potentially reaching 5% by January 2023 and then slightly undershooting the Bank of England's mandated 2.0% inflation target from April 2023.