Employers’ ability to match the cost of living in pay settlements has suffered another blow as the investment bank Goldman Sachs predicted that UK inflation could peak at 22.4%.
With the Bank of England measuring the consumer prices index at 10.1% for July, and predicting a peak of 13.3% before the end of the year, Goldman Sachs’ inflation forecast joins others that have predicted a worse outlook.
Goldman Sachs economists led by Sven Jari Stehn said that if prices stayed at current levels, then energy regulator would be forced to hike the energy price cap for consumers by a further 80% in January 2023.
That would be on top of October’s 80% increase in the cap, which pushes average gas and electric bills to £3,550 per year.
If that happened, the investment bank said it would push inflation to 22.4%, and prompt a 3.4% decline in GDP.
Even if wholesale energy prices become more subdued, as some analysts expect, UK inflation could still peak at 14.8% in January.
The note read: “Wholesale gas prices in the UK have surged by 145% since the start of July, and while our commodity strategists do not expect the recent spike in European gas prices to persist, we view persistently higher gas prices as an upside risk to our forecast for the Ofgem price cap increase in January.
Inflation and wages
“Indeed, in a scenario where gas prices remain elevated at current levels, we would expect the price cap to increase by over 80% in January (vs 19% assumed in our baseline), which would imply headline inflation peaking at 22.4%, well above our baseline forecast of 14.8%.”
Last week another investment bank Citigroup predicted inflation rates hitting 18% in January, describing the levels as “stratospheric”.
The Office for National Statistics said that real-terms wages fell by a record 3% this month (16 August leading unions to call for urgent action to support workers with the cost of living.
While average weekly pay excluding bonuses grew by 4.7%, the ONS said, after inflation was taken into account this meant pay was worth 3% less than in the same period last year.
The latest data from XpertHR echoes the ONS’s findings on pay, showing the median basic pay award in the three months to the end of July to be 4%, lagging significantly behind inflation.
Meanwhile, today the British Retail Consortium said its shop price annual inflation accelerated to 5.1% in August, up from 4.4% in July and a new record for shop price inflation since this index started in 2005.