Citigroup predicts that UK inflation will return to 2% in autumn

The government has hope that rapid drops in gas prices will help solve some of its most pressing economic problems

Citigroup predicts that UK inflation will plummet from double-digit rates down to around 2% by the end this year. Rapid falls in gas prices offer Rishi Sunak’s government hope to solve some of its most pressing economic problems.

Citi stated Wednesday that consumer price inflation would likely fall to 2.3% in November. This is well below the Bank of England forecast of 4% for the fourth quarter.

The UK Prime Minister has received a boost from the new projections, which could make it easier for him to resolve strikes in the public sector over pay and fulfill his promise to halve inflation by the end the year. Inflation in January was 10.1%.

Benjamin Nabarro (Citi’s chief UK economist) stated that the faster fall in inflation this year mainly reflects a decrease in prices, especially in energy. He expects UK headline inflation will fall to below 5% from July. He had expected this to happen in October a month ago.

Citi’s latest forecasts indicate a possible fall in household energy bills, as wholesale gas prices continue their decline. In the last two months, the price of UK gas to be delivered in September has fallen by more than 80 percent from its peak in August. It was at PS2.60 per therm.

According to the latest forecasts by consultancy Cornwall Insight, these falls will result in a lower electricity price cap for the fourth quarter of the year. It will be as low as PS3,295 for a household that has an average consumption of gas or electricity and go down to PS2,161,

Inflation will be lowered by lower energy prices. The cap is expected to be lower than the PS2,500 energy price guarantee for the fourth quarter 2022.

The Office for National Statistics will increase the percentage of gas and electricity in its consumer price index from 3.6 percent to 4.8 percent this year, accelerating the decline in inflation. The index’s higher weighting for electricity and gas will help to lower inflation.

Nabarro predicted that retail price inflation, which is used for upgrading PS560bn inflation-linked government debt, will also fall quickly, providing a potential boost for the public finances. This would limit the debt servicing costs.

He anticipates that the RPI inflation measure will drop from 13.4% to 4.3 percent in the fourth quarter. This is well below the Office for Budget Responsibility’s November forecast of 6.3 percent towards the end 2023.

This would allow the government to reduce the cost of servicing its debt. The UK is more vulnerable than other countries to this area because of the higher proportion of its inflation-linked debt.

According to the Treasury’s survey, the average CPI inflation forecast for the fourth quarter by economists was 4.5 percent. This is down from the January poll which saw a 5 percent prediction. The RPI forecast for this same period was 6 percent, which is down from 6.8 percent forecast one month ago.