- U.K. inflation could hit 22.4% next year if energy prices continue their upward spiral, Goldman Sachs warned.
- It comes after British households were hit with a projected 80% increase in their energy bills in the coming months.
- The investment bank also forecast that gross domestic product could drop 3.4%.
LONDON — U.K. inflation could soar above 22% next year if energy prices continue their upward spiral, U.S. investment bank Goldman Sachs warned.
In a research note dated Monday, Goldman said headline inflation could peak at 22.4% and gross domestic product could drop by 3.4% if energy costs keep rising at their current pace.
It comes after British households were hit with a projected 80% increase in their energy bills in the coming months, taking the average annual household bill to £3,549 ($4,197) from £1,971 and exacerbating the country's existing cost-of-living crisis.
Britain's energy regulator announced Friday that it would raise its main cap on consumer energy bills from Oct. 1 to keep pace with rising wholesale gas prices, which have surged 145% in the U.K. since early July.
Ofgem is due to recalculate its price cap again in three months. However, Goldman said that if prices remain "persistently higher," another 80% hike could be possible.
"In a scenario where gas prices remain elevated at current levels, we would expect the price cap to increase by over 80% in January ... which would imply headline inflation peaking at 22.4%," Goldman economists, led by Sven Jari Stehn, said in the note.
If, however, energy prices moderate, U.K. peak inflation is likely to hit 14.8% in January, Goldman's commodity strategists predicted — well above the 13.3% forecast by the Bank of England earlier this month.
The bank also said that the U.K. was likely to fall into a recession in the fourth quarter. It forecast that the U.K. economy would contract by -0.3% on a non-annualized basis in the fourth quarter of this year, followed by -0.4% and -0.3% in the first and second quarters of 2023, respectively.
"We now expect the deepened cost-of-living crisis to push the U.K. economy into recession later this year," the note said.
Goldman's outlook is the latest gloomy forecast for the British economy, with Citi predicting last week that U.K. inflation would breach 18% in January 2023.