UK inflation will sink below the Bank of England’s 2% target by the end of the year if the £2,500 ($3,014) household energy bills cap is extended at this week’s budget, according to Goldman Sachs.
(Bloomberg) — UK inflation will sink below the Bank of England’s 2% target by the end of the year if the £2,500 ($3,014) household energy bills cap is extended at this week’s budget, according to Goldman Sachs.
The US bank’s economists predicted a rapid fall in the inflation rate from double digits to 1.8% later this year after the plunge in natural gas prices. It’s lower than any inflation projection for the fourth quarter in Bloomberg’s survey and well below the current rate of 10.1%.
Chancellor of the Exchequer Jeremy Hunt on Wednesday is expected to extend the Energy Price Guarantee capping bills at an annual average of £2,500 per household for a further three months. The decision, due in the Treasury’s annual budget, would erase an expected increase to £3,000 from April. Cheaper gas prices have slashed the cost to the public purse of keeping the more generous level of support in place.
A rapid cooling in price growth would ease the pressure on the Bank of England to continue sharp interest rate rises as it begins to consider whether to pivot to a pause in its hiking cycle. The central bank currently expects inflation to near 4% by the end of the year.
“The outlook for real household incomes has brightened, thanks to falling energy prices and the prospect of more fiscal support,” Sven Jari Stehn, economist at Goldman, wrote in a note to clients. “We expect Chancellor Hunt to announce next week an extension of the Energy Price Guarantee at £2,500 until June. As a result, we lower our forecast for headline CPI inflation to 1.8% by the end of the year, compared with 3.6% a few weeks ago.”
An easing in UK price growth that sharp would allow Prime Minister Rishi Sunak to claim victory on his promise to halve inflation by the end of the year, one of five key pledges he made to voters.
However, Goldman also warned that domestic price pressures “remain acute despite some recent moderation”, adding that the labor market is still “very tight.”
Forecasters are handing the UK a brighter outlook on both GDP and inflation as the slump in gas prices eases the pressure on households. Goldman’s prediction comes after Citigroup last month predicted that inflation will sink to 2.4% in the fourth quarter of 2023.
Bloomberg’s monthly survey of forecasters shows they expect inflation to slip to 3.3% in the fourth quarter of 2023, down from 3.9% in the previous survey. Economists also expected a shallower recession, predicting a 0.5% fall in GDP In 2023 compared to a 0.7% drop previously.
–With assistance from Harumi Ichikura.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.