Rising energy price cap could see UK inflation reach 15% in early 2023

Think tank warns of a higher and later peak for inflation in the UK due to the rising energy price cap.

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New analysis by the Resolution Foundation think-tank warns that rising gas prices could trigger the Bank of England to forecast a higher and later peak for inflation in the UK.

The Resolution Foundation briefing note – In the dread of winter – looks at how the outlook for UK inflation has changed since the Bank of England’s last Monetary Policy Report (MPR) in May.

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Contrary to several claims, global commodity prices have actually declined significantly over the past few months, with oil prices 7 percent below their peak in 2022.

Some commodities have seen even steeper declines, with lumber prices 61% below their high in 2022. This will alleviate inflationary pressures worldwide.

In contrast, the anticipated winter 2022-23 gas prices in the United Kingdom are about 50 percent higher than they were following the Russian invasion of Ukraine.

As a result, the Bank of England is expected to predict this week that inflation will peak later and at a higher level.

At the time of the most recent Monetary Policy Report in May, the Bank anticipated that the inflation rate will peak at 10% in the fourth quarter of 2022.

However, the impact of the rising energy price cap makes it likely that inflation may reach 15% in the first quarter of 2023.

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The Resolution Foundation argues that while the long-term direction of inflation remains highly unpredictable, the likelihood of it dropping back to low levels by the end of 2023 is diminishing.

Jack Leslie, Senior Economist at the Resolution Foundation, said: “The outlook for inflation is highly uncertain, largely driven by unpredictable gas prices, but changes over recent months suggest that the Bank of England is likely to forecast a higher and later peak for inflation – potentially up to 15 per cent in early 2023.

“While market prices for some core goods – including oil, corn and wheat – have fallen since their peak earlier this year, these prices haven’t yet fed through into consumer costs and remain considerably higher than they were in January.

“With gas prices continuing to reach record levels, both households and businesses will see large increases in their energy bills throughout the winter and into 2023.

“How long this high inflation will last is hugely uncertain, but the cost of living crisis looks set to last longer and hit households harder than previously anticipated.”

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