Inflation could soar to over 22 per cent if gas prices stay high, Goldman warns

Inflation could soar to the highest level since 1975 if global gas prices do not fall from their historic highs, a Wall Street investment bank warned today.

The cost of living would climb to a peak of 22.4 per cent if the energy watchdog is forced to heap even more woe onto households by passing on elevated gas prices again in January, according to Goldman Sachs.

The fresh warning adds to the string of experts warning the UK is set to tumble into a tough slump over the winter that may last for more than a year.

Goldman also warned in a note over the weekend that Britain will tip into a recession in the final months of this year and stay there until the beginning of 2024. Citigroup earlier this month said inflation is set to peak at nearly 19 per cent.

The Bank of England earlier this month also warned the country is headed for the longest downturn since the financial crisis.

Concerns over the rapidly declining strength of the UK economy have put heavy downward pressure on the pound, which today dropped to its lowest level against the US dollar since the first Covid-19 lockdown in March 2020.

London’s FTSE 100 gave up early morning gains today, falling nearly one per cent near the close.

Yields on UK government gilts also surged, driven by investors pricing in more rate rises from the Bank and fleeing sterling-denominated assets on recession jitters. Yields and prices on bonds move inversely.

“In a scenario where gas prices remain elevated at current levels, we would expect the price cap to increase by over 80 per cent in January,” Goldman warned.

Under those circumstances, the British economy would shrink 3.4 per cent “due to a larger hit to real disposable incomes,” the Wall Street titan added.

The energy regulator Ofgem last week said household bills will jump 80 per cent in October to £3,549.

Brits are set to absorb the worst hit to their living standards on record over the next 18 months or so due to rising prices eroding wage growth. 

Experts have warned without a cost of living support package launched by Tory leadership hopefuls Liz Truss or Rishi Sunak after one of them enters Number 10 next Monday, millions will tip into fuel poverty.

Both candidates have said they will offer more support after the leadership contest ends.

Household consumption is expected to dip in response to this living standards shock, dealing a sharp blow to the health of the economy.

Elevated inflation will force Bank governor Andrew Bailey and the rest of the monetary policy committee to keep hiking interest rates rapidly despite the economic slump.

“We continue to look for the BoE to hike by another 50 basis point in September and see upside risks to our expectation of 25 basis point hikes in November and December given continued upside inflation and wage growth surprises and the need to keep inflation expectations anchored,” Goldman said.

The Bank has lifted borrowing costs six times in a row to tame rising prices, sending them to 1.75 per cent. Prices are up 10.1 per cent over the last year, the quickest acceleration in 40 years.

Inflation has soared over the last year

Central banks rarely raise interest rates during a recession to avoid piling more pressure on household and businesses’ finances.