Inflation could sky-rocket to above a “stratospheric” 18 per cent, a leading investment bank warned on Monday as millions of households were braced for energy bills to spiral.
Citi issued the alert that inflation could reach levels not seen since the 70s.
As gas prices continued to climb, the bank forecast that the retail energy price cap would jump from £1,971 to £4,567 in January and then £5,816 in April. This would see inflation “entering the stratosphere” — of 18.6 per cent in January.
And in a warning that will alarm many homeowners, Citi added that should “signs of more embedded inflation emerge, we think Bank Rate of 6-7 per cent will be required to bring inflation dynamics under control”.
Benjamin Nabarro, chief UK economist at Citi, said: “We now expect CPI inflation to peak at over 18 per cent in January.” This would surpass the height of inflation after the second Opec oil shock of 1979 when CPI topped 17.8 per cent.
Other economists are also predicting inflation could reach 15 per cent, above the Bank of England’s forecast of more than 13 per cent.
If energy bills hit more than £5,800 a year, the Government would be forced to intervene.
The wholesale price of gas in the UK this morning soared past the peak it touched shortly after Vladimir Putin’s invasion of Ukraine — just four days before the announcement of the new energy price cap for consumers.
The September contract reached £5.55 per therm on London ICE Exchange, above the £4.93 touched in early March. This price is the biggest single determinant of the level of household bills.
Millions of households would be lumbered with energy bills above pre-crisis levels for a decade under a scheme backed by gas and electricity chiefs.
Industry bosses are pushing a Tariff Deficit Fund as families across Britain are braced for bills to soar even higher in October when the energy price cap is expected to rise from £1,971 for direct debit customers, and £2,017 via prepayment meters, to more than £3,500.
The autumn cap level will be announced on Friday and it is feared that in January it could spiral even higher to above £4,200.
Given the scale of the crisis, energy chiefs are proposing the new fund to keep down bills now at £1,971 or slightly above and return them over a decade or so to pre-crisis levels, with the price cap having been £1,277 before April.
Greg Jackson, chief executive of Octopus Energy, told BBC Radio 4’s Today programme: “Essentially we freeze the price cap roughly where it is and fund that during times when energy prices are very high and pay it back when they are coming down.
“What that would see is prices stay around where they are now... and they would then drift back down to maybe £1,000 a year over the next decade.”
The industry has modelled the fund on the basis that the cap stays at around £1,971 over the next three years and then falls to some £1,100 over a decade.
The fund would be financed through government-backed loans totalling up to £90 billion and would be paid back through energy bills over this extended period, though it could also be done through general taxation.
Any decision on such a move would only be made once Liz Truss or Rishi Sunak becomes Tory leader on September 5 and then PM. Ms Truss is due to hold an emergency budget within weeks, if she gets into No10.
Labour has pledged to cap bills at their current level through a £30 billion, six-month package including an extended windfall tax on oil and gas firms.
Visiting a insulated homes project in Walthamstow, north east London, this morning, Labour leader Sir Keir Starmer said: “The energy price cap rise is sending people into a spiral of worry. There’s a choice to be made here and Labour are clear whose side we are on.
“We would tax the profits of oil and gas producers and use that money to freeze energy bills, making sure people don’t pay another penny on their bills this winter.
“We’re in a cost of living emergency and people need help now.”
There is disquiet that the lengthy Tory leadership contest has delayed action on energy bills.
Bill Bullen, boss of energy firm Utilita, said: “They are constantly chasing this problem at the moment. They need get ahead of it.”
