U.K. inflation is expected to reach 18% in January as the country's energy price cap goes up.
In a note dated Sunday, the U.S. banking giant updated its forecasts for the consumer price index and retail price index. The assumption is that there will be a policy offset applied to household energy bills for the rest of the year.
The scale of the next price cap increase is expected to be announced this week by Ofgem. Due to the rise in wholesale prices, the price cap on the amount a supplier can charge has increased, meaning Brits have seen their bills go up.
Cornwall Insight and Auxilione both predicted a rise in the cap in January, with Auxilione expecting it to go over $6,000 by the spring.
Guidance on future increases will be the most notable aspect of this week's announcement, according to Benjamin Nabarro, senior associate in the global strategy and macro group at Citigroup.
In January and April, we expect the increase to be over $6,000. The risks are skewed to the upside.
After a new prime minister takes office in September, the question is how government policy will affect the economy. He suggested that Liz Truss' comments point to a limited offset for inflation.
The suspension of the Green Levy and a cut to VAT on household energy bills will result in a £300 reduction in bills.
The government's response to this is likely to involve a lot of fiscal firepower. Setting the energy increase in full would cost around 30 billion dollars.
He said that the issue for inflation is that any fiscal space deployed is likely to be squeezed between weaker medium-term forecasts and the new government's desire to cut taxes.
The U.K.'s longest recession since the global financial crisis was projected by the Bank of England after it hiked interest rates by 50 basis points. In October, it predicted that inflation would peak at 13.3%.
The Bank's Monetary Policy Committee will meet three times in the coming months. The U.K. inflation hit 10.1% in July, and is expected to exceed the latest projections from the Monetary Policy Committee.
Last week's data re-affirmed the continued risk of pass-through from headline inflation into wage and domestic price setting.
The risks surrounding more persistent inflation have intensified with inflation now set to peak substantially higher than the 13% forecast in August
In order to get inflation under control, a benchmark lending rate of between 6 and 7 percent is needed. The bank rate is low.
Nabarro said that evidence for such effects are limited, with increases in unemployment more likely to allow the MPC to pause around the turn of the year.
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