UK inflation to hit 18% as energy bills rocket, warns Citi – business live

Surging energy bills will drive UK inflation over 18% early next year — the highest peak in almost half a century — investment bank Citi has warned.

Citi has forecast that CPI inflation will hit 18.6% in January 2023, while the RPI inflation rate will hit 21%, due to extremely painful rises in energy bills that will push the cost of living into the “stratosphere”.

Citi predicts that the price cap on energy bills across Great Britain will rise to £3,717 in October (up from £1,971 today), and then jump to £4,567 in January and then £5,816 in April.

Benjamin Nabarro, chief UK economist at Citi, told clients:

Our latest estimate, updated for the further 25% and 7% rally in UK gas and electricity prices last week, points to a further upside shift in UK inflation.

Accounting for these developments, as well as updating our own weights for CPI/ RPI and honing our own accounting for curve backwardation, we now expect CPI inflation to peak at over 18% in January. RPI inflation, we think, will peak at over 20%.

The question now is what policy may do to offset the impact on both inflation and the real economy, Nabarro adds:

For now, we think [Liz] Truss’s comments point to only a limited offset for headline inflation. Though the risks remain skewed towards further support.

Earlier this month the Bank of England forecast that UK inflation will peak over 13% this autumn when the energy price cap is lifted.

Wholesale gas prices have continued to rise through August, as Vladimir Putin has ‘weaponised’ Russia’s energy supplies.

As flagged earlier, they’ve surged this morning as Gazprom prepares to shut down its Nord Stream 1 pipeline for three days at the end of this month.

The FT points out that if UK inflation hits 18%, that would be higher than the peak of inflation after the second Opec oil shock of 1979 when CPI reached 17.8%, according to estimates from the Office for National Statistics.

One group of workers has managed to get an inflation-beating increase in earnings – Britain’s CEOs.

Chief executives of the UK’s 100 biggest companies have seen their pay jump by 39% to an average of £3.4m, according to research by the High Pay Centre thinktank and the Trades Union Congress (TUC).

The median average pay of CEOs of companies in the FTSE 100 index rose to £3.4m in 2021, compared with £2.5m in 2020 during the height of the coronavirus pandemic when many bosses took a voluntary pay cut as they placed millions of employees on furlough.

CEO pay has also surpassed the £3.25m median recorded in 2019, before the pandemic.

Here’s the full story, by our wealth correspondent Rupert Neate:

If beer prices had risen as fast as gas prices this year, then a pint of beer would cost £25, the head of supplier Octopus Energy points out.

Greg Jackson, founder and chief executive of Octopus, told Radio 4’s Today Programme that gas prices are currently nine to 11 times higher than usual.

“Look, to put that in perspective, if this was beer, we’re talking about the wholesale price being £25 a pint.

“People don’t know what a therm is, but, underneath it, the price per therm has gone from 60p to around £5 at the moment and that’s what’s passing through to customers if we don’t do something.”

Jackson added that there are systemic issues within the energy industry, but that energy suppliers can’t be expected to pass such high wholesale costs onto consumers.

Energy regulator Ofgem is due to announce the UK’s energy price cap on Friday. Bills could soar around 80% from October, to £3,600 per year from £1,971 at present.

Jackson warned that the UK’s energy bill is rising from £15bn in a normal year to £75bn this year – the equivalent of an extra 9p on the base rate income tax.

He says the government must increase its existing support package – one option would be to create a ‘tariff deficit fund’, which would freeze the cap where it is, and repay the cost when wholesale prices return to normal levels.

UK wholesale gas prices have surged this morning, after Russia announced it will halt supplies through its main pipeline to Europe for three days at the end of the month.

The price of gas for delivery to the UK next month has risen almost 20% to 550p per therm.

That’s its highest since early March after the Ukraine war began.

The day-ahead UK gas price has jumped 27% to 460p per therm.

European gas prices have risen too, with the benchmark September contract up 5%, and the October contract jumping 10%.

The move comes after Gazprom said on Friday it would conduct unscheduled maintenance on a Nord Stream 1 turbine, which pumps gas under the Baltic Sea to Germany.

The move deepens an energy standoff between Moscow and Brussels, at a time when European countries are trying to build up stockpiles for the winter.

Analyst Nathan Piper of Investec says concerns over gas supplies are rising, pushing up prices:

Gazprom announced an unplanned maintenance of a Nordstream 1 turbine. Gas supplies via the pipeline will be shut off for at least three days starting end August.

Russian gas supplies to Europe were already down 75% year on year and this announcement has pushed UK/European gas prices to all-time highs (10x the 10-year average) for five consecutive days.

We anticipate a further surge in spot prices and the forward curve as uncertainties around gas supply increase ahead of winter, when gas demand rises for heating.

The UK’s summer of industrial action is continuing as dock workers in Felixstowe hold an eight-day strike over a pay dispute.

Around 1,900 workers at the UK’s biggest container port began their first strike since 1989 on Sunday, leading shipping companies and union leaders to warn that supply chains could be disrupted.

Workers including crane drivers, machine operators and stevedores will take action after voting by more than nine to one in favour of strikes.

The Unite union said the eight-day stoppage would have a big impact on the port, which handles around 4m containers a year from 2,000 ships.

Robert Morton, Unite’s national officer has told Sky News that Felixstowe workers are seeking protection from the cost-of-living crisis.

“We are trying to keep pace with the inflation rate, yet the employer at Felixstowe has offered a 7% increase as well as a £500 lump sum payment that’s not consolidated within the pay.”

Morton pointed out that the RPI inflation rate is now 12.3%:

“Like all negotiations, you don’t always get what you want.

“However, if we can sit down and thrash this out, there will be a figure between 7% and 12.3% that’s acceptable to my membership.”

In response to the offer being much more than that offered to NHS staff, Mr Morton said:

“I think that the NHS staff should be paid more than anyone else actually, but our members are working (outside) in all kinds of weather, they’re very highly skilled people and I think they deserve more from the company who is making massive profits and is extremely.

“My message to them is ‘if you can pay it, then do so’.”

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

Troubled cinema chain Cineworld has confirmed that it is considering filing for bankrupcy protection in the United States, as it looks to restructure its balance sheet and raise extra funds.

In a statement to the City this morning, Cineworld says that its Cineworld and Regal theaters globally are open for business as usual while it considers various strategic options – including a possible voluntary Chapter 11 filing in the US, and similar measures in other jurisdictions.

The world’s second-largest cinema chain is struggling with near-term liquidity following the disruption of the pandemic, and a slower-than-hoped recovery in movie-going, which has left it with debts of more than $4.8bn (£4bn).

The cost of living crunch has added to the leisure industry’s woes, as consumers are forced to cut back.

The company, which operates 751 sites in 10 countries including the Cineworld and Picturehouse chains in the UK, says there wouldn’t be any ‘significant impact’ on its staff if it filed for bankrupcy protection.

Cineworld says it is looking at options to raise “additional liquidity and potentially restructure its balance sheet through a comprehensive deleveraging transaction”.

Any such filing would be expected to allow the Group to access near-term liquidity and support the orderly implementation of a fully funded deleveraging transaction.

Cineworld would expect to maintain its operations in the ordinary course until and following any filing and ultimately to continue its business over the longer term with no significant impact upon its employees.

Cineworld employs around 45,000 peope worldwide, including more than 5,000 in the UK.

Shareholders could see their stakes heavily diluted, Cineworld adds:

As previously announced, any deleveraging transaction would, however, result in very significant dilution of existing equity interests in Cineworld.

Cineworld’s evaluation of these strategic options remains ongoing. A further announcement will be made if and when appropriate.

Also coming up today

Recession fears are knocking the oil price this morning. Brent crude has fallen over 1% to $95.45 per barrel, on concerns that aggressive US interest rate hikes will hurt an already-weak global economy, and knock demand for fuel.

European stock markets are set for a lower open, as investors await the Kansas City Fed’s two-day annual economic symposium, in Jackson Hole, Wyoming, at the end of the week.

Federal Reserve Chair Jerome Powell will deliver his keynote address on Friday, and could signal how high U.S. borrowing costs may go and how long they will need to stay there to bring down soaring inflation.

UK barristers are waiting for the results of an all-out strike ballot for industrial action next month as part of a row with the Government over jobs and pay.

Members of the Criminal Bar Association (CBA) have been walking out on alternate weeks but have been balloted on an indefinite, uninterrupted strike that would start on September 5.

The ballot closed at midnight on Sunday and the result is expected this morning.

The agenda