Latest UK Inflation Forecasts Reveal the Pain that is to Come

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UK inflation could peak at 12% in October according to a number of new economic forecasts made in the wake of Wednesday's release of inflation data for June that showed consumer prices are already rising at their fastest pace in 40 years.

"We now expect UK CPI inflation to peak at nearly 12% in October," says Andrew Goodwin, Chief UK Economist at Oxford Economics.

This, and an host of other updated forecasts, underscores a new-found determination by Bank of England Governor Andrew Bailey to accelerate the Bank's fight against accelerating prices.

Oxford Economics expects inflation to remain much higher in 2023, reflects a combination of surging energy futures prices, a spike in oil refinery margins that is likely to keep UK petrol prices high, and a weaker pound.

The independent research consultancy estimates Ofgem will raise the energy price cap by nearly 60% to £3,135 in October – much higher than the 40% increase Ofgem had estimated.

Heaping further pain on consumers and businesses they expect a further £340 rise in January.

The NIESR say they now forecast annual CPI inflation to peak close to 11% towards the end of 2022/beginning of 2023, because of the hike in the energy price cap, and remain above target through 2023.

UK inflation stood at 9.4% year-on-year in June said the ONS on Wednesday, a figure hotter than the market's expected 9.3% and up on May's 9.1%.

This after prices rose 0.8% in the month to June, ahead of the 0.7% expected by markets and the 0.7% rise in the month to May.

Core CPI - which strips out external drivers such as fuel - rose 5.8% year-on-year, which was in line with expectations and touch lower than May's 5.9%.

The data also showed price rises were widespread and not necessarily just confined to energy increases, an observation that heaps pressure on the Bank of England to stamp on rising inflation expectations amongst workers and businesses.

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics says the headline rate of CPI inflation now looks set to rise to nearly 12% in October.

"The further surge in wholesale electricity and natural gas prices over the last month suggests that Ofgem will increase its default tariff cap by an eye-watering 65% in October. This indicates that energy’s contribution to the headline rate of CPI inflation will soar to 6.0pp in October, from 3.4pp in June, provided oil prices stay at their current level," he says.

But food CPI inflation also has further to rise says Tombs, given June’s 12.2% rate of food producer price inflation and May’s 16.6% rate of food import price inflation.

The Bank of England said at the occasion of its June policy update that it was now ready to take "forceful" steps to raise rates.

Investors have interpreted this as the Bank suggesting it will ditch its 25 basis point hikes for a more sizeable 50 basis point hike in August.

In a speech delivered at Mansion House on Tuesday Bailey said "a 50 basis point increase will be among the choices on the table when we next meet."

Kallum Pickering, Senior Economist at Berenberg, says he now thinks that 50bp steps are the most likely outcome at both the 4 August and 15 September meetings (up from 25bp each before).

Capital Economics are another independent research house that thinks CPI inflation will rise to 12.0% in October.

Modupe Adegbembo, G7 Economist at AXA Investment Managers expects a further increase in the Ofgem price cap in October that could push inflation higher in the Autumn.

"Food and energy prices continue to rise at a robust pace edging inflation higher and is likely to push higher over the coming months," says Adegbembo.

AXA Investment Managersnow expects inflation to average 8.7% this year (up from 7.7%) and 4.8% in 2023 (up from 3.6%), reflecting rising gas prices and a broadening of inflation pressures.

James Smith, Developed Markets Economist at ING says the next rise in the household energy price cap, due in October, looks set to exceed April’s 54%, though the ONS is still yet to decide whether the effect of the government’s £400 energy rebate will factor into the CPI numbers.

"Assuming it doesn’t, headline inflation is likely to peak at around 11.5% in October," says Smith.

Investec's utility team is meanwhile forecasting a further rise in the Ofgem energy price cap in October to £3,285 (+67%).

"This increase should send CPI inflation into the double-digits," says economist Ellie Henderson at Investec.