Energy prices could push UK inflation to 22%, a near post-war record

Inflation in the UK could top 22% next year, close to the post-war record set in 1975, if wholesale energy prices remain at current high levels, Goldman Sachs has warned.

Highlighting the pressure on households and businesses, the US investment bank said inflation could peak at 22.4% next year if wholesale gas and electricity prices continue to spiral over the winter.

In a scenario where prices “remain elevated at current levels”, economists at the bank said the Ofgem energy price cap for household bills could rise by more than 80% in January. This would “imply headline inflation peaking at 22.4%”.

Inflation rose above 10% for the first time since the early 1980s in July, fuelled by surging wholesale energy prices and the rising cost of basic essentials. Inflation hit a post-war record of 24.5% in August 1975.

The forecasts for inflation hitting levels unseen since the oil shock and industrial strife of the 1970s come as pressure mounts on Liz Truss, the Conservative leadership frontrunner, to clarify her plans for supporting households and businesses.

Amid concerns over the impact from rising gas and electricity bills, charities have warned many families could be plunged into destitution this winter.

Wholesale gas prices in the UK have climbed by 145% since the start of July amid fears of shortages this winter as Russia throttles supplies to Europe. Goldman said it did not expect the recent leap in European gas prices to persist, meaning inflation was likelier to peak at close to 15% early next year.

However, the bank’s analysts said they viewed persistently high gas prices as an “upside risk to our forecast,” suggesting there was potential for a significantly higher inflation rate than anticipated.

Gas prices have fallen back in recent days after Germany’s economy minister said its storage facilities had reached 85% of their capacity, ahead of expectations. The EU is also preparing to make “emergency interventions” which could help bring down current soaring prices.

The Goldman forecast is the latest eye-watering estimate for UK inflation, surpassing predictions made by the US bank Citi for an 18.6% peak next year. The Bank of England has forecast a peak above 13%.

It comes after the energy regulator last week confirmed a rise in the consumer price cap from the start of October, lifting typical energy bills to £3,549 – almost triple the level seen a year ago. Some analysts forecast bills could top £6,000 from as early as spring next year, up from closer to £1,000 before the Covid pandemic.

The surge is expected to lead households to dramatically rein in their spending on other goods and services to make ends meet, as sky-high inflation leads to the biggest drop in living standards since the 1950s.

Goldman’s analysts said the cumulative impact would push the British economy into recession, forecasting a 1% drop in gross domestic product (GDP) as a consequence. If persistently higher energy prices drive inflation above 22%, it said the bigger hit to household incomes would lead to a 3.4% drop in GDP.


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