'Catastrophic': Inflation could hit 18.6% in January, experts warn

File photo dated 26/12/20 of people carrying shopping bags in Bournemouth, as UK retail sales picked up in July but continued to show longer-term signs that consumers are making cutbacks to save money amid soaring inflation, according to official figures.
Inflation hit a 40-year high in the 12 months to July. (PA) (PA)

UK inflation could hit 18.6% in January, the highest in almost half a century, a new forecast from a leading investment bank has revealed.

According to Citigroup the energy price cap – which puts a maximum price on the amount energy companies can charge per unit of energy used – will hit £4,567 in January and then £5,816 in April, driving inflation even higher than previously predicted, the Financial Times reported.

Experts have warned this level of price rises would be "catastrophic" for families' budgets.

Inflation hit its highest level in 40 years on Wednesday at 10.1% in the 12 months to July - up from 9.4% in June, data from the Office for National Statistics (ONS) revealed.

On 4 August, the Bank of England (BoE) forecast inflation could hit 13.3% by 2023.

Read more: How does UK inflation compare to other European countries?

It comes as Ofgem prepares to announce its price cap for October on Friday, with energy consultancy Cornwall Insight forecasting it will hit £3,554 - up from the current level of £1,971.

UK inflation is at its highest level for decades. (ONS CPI)
Energy bills are predicted to surge this winter. (Cornwall Insight predictions)
Energy bills are predicted to surge this winter. (Cornwall Insight predictions)

Experts have warned that rising inflation will hit the poorest households the hardest.

Analysis from the Institute for Fiscal Studies (IFS) found the poorest 20% are facing inflation of 17.6% by October. In contrast, the richest 20% are facing inflation of 10.9%.

This is because households on the lowest incomes spend a greater proportion of their income on essentials such as food and fuel, which are soaring in price.

Read more: UK inflation: Food and energy bills to cost more than 50% of your pay

"We're looking at 1970s style, inflation going up to 13 or 14%," Paul Johnson, director of the IFS, told TalkTV on Wednesday.

He added: "It clearly is a big, big issue for people on relatively low incomes... they will be facing higher inflation because they spend more of their income on energy and food.

"So, we reckon that inflation for poor households will be 18% in a couple of months time."

Inflation will hit poorer households harder than richer ones. (Institute for Fiscal Studies)

Responding to Citi's inflation forecasts Dr George Dibb, head of IPPR's centre for economic justice, told Yahoo News UK inflation on that scale is "extremely worrying".

"We saw last week that food and other essentials are now contributing significantly to inflation, if these everyday items are rising in price by over 18% a year that’ll be catastrophic for household budgets," said Dibb.

Read more: Quit smoking and stop living off takeaways to cope with cost of living crisis, Tory MP says

"At the same time, without ambitious policy in place from the government, we may face a deep and sustained recession."

The Treasury said the government recognises inflation is causing "significant challenges" for households.

“We are working alongside the Bank of England to get inflation down, through independent monetary policy alongside responsible tax and spending decisions and reforms to boost productivity and growth," a spokesperson said.

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