UK Inflation Could Reach 20%, Goldman Warns

Inflation in the UK could reach almost 15% in January, and may rise as high as 20% early next year in the event gas prices don’t moderate.

That’s according to Goldman analysts including Sven Jari Stehn and Steffan Ball who, in a new note, painted what I think it’s fair to call a grim picture.

The bank now sees a recession starting later this year. Goldman’s forecasts are below consensus, but still more optimistic than the Bank of England’s outlook, as detailed earlier this month in a truly unfortunate set of projections accompanying the largest rate hike in 27 years. It raises eyebrows when a central bank harbors an outlook that’s materially worse than the most pessimistic private sector forecasts.

The proximate cause of Goldman’s recession call is obviously the UK’s spiraling cost of living crisis, the worst in at least six decades. The latest data from ONS showed another drop in real disposable incomes in Q1 (figure below).

The streak of quarterly declines was already the longest since 1955, and it seems to me that data for subsequent quarters should be far worse given developments in energy prices.

Liz Truss is struggling to outline a coherent plan to rescue households, but as the FT noted while documenting prospective VAT cuts, “Truss has previously ruled out giving ‘handouts’ to ease income pressures, describing it as ‘taking money from people in taxes and then giving it back to them in benefits.'” I’ll politely eschew the temptation to engage.

Ofgem said Friday that the energy price cap will rise by 80% in October. Goldman cited the increase in projecting a rise in headline CPI to 14.8% in January. Even that assumes “some moderation of gas prices in coming months,” the bank wrote, on the way to warning that “inflation risks are skewed to the upside, however, and headline inflation could top 20% in early 2023 if gas prices remain at their current levels.”

The BoE’s inflation forecasts are, frankly, a source of embarrassment for the MPC. At its August 2021 meeting, the BoE projected Q3 2022 CPI would be 3.3%. That projection is now almost 10 percentage points higher, at 13% (figure above).

CPI rose double-digits in July, data out earlier this month showed. It was a dubious milestone. Inflation hasn’t exceeded 10% in the UK in four decades.

Goldman expects £30 billion in fiscal support and excess household savings will cushion the economy, but the bank warned it still sees “risks towards the UK growth outlook as skewed towards a deeper and longer recession in case of even higher inflation, less fiscal support and more consumer caution.”

The figure on the left (above) provides some historical context. The figure on the right illustrates how bad it could get.

If you’re wondering whether the BoE might reconsider additional tightening in light of the onerous circumstances, Goldman’s answer, for now, is “no.”

“Despite the incoming recession, we expect the BoE to continue to tighten rapidly to fight inflation, with another 50bps at the September meeting and risks towards continued half-point steps in Q4,” the bank wrote. The BoE’s August hike was the sixth consecutive.

One backbench Conservative MP who spoke to the FT for the linked article (above) suggested households only had one question: “The worry is ‘how long will this go on for?'”

Boris Johnson, whose problem this isn’t, is optimistic. “The next few months will be tough but I’m convinced Britain’s bounceback will be golden,” he said.