FTA Vantage Point: Interest Rates  

Manager predicts year of 7% inflation for UK

Manager predicts year of 7% inflation for UK
Photo: Negative Space via Pexels

Britain can look forward to a year of 7 per cent inflation, analysis from the Bank of America Merrill Lynch has predicted.

In its latest UK Economic Watch, BofAML's economists have updated their inflation forecast to 7 per cent for most of 2022.

The Economic Watch agreed with consensus estimates of a 7.9 per cent consumer prices index print in April, as higher energy prices start to hit savers, and commodity and forex start to rise amid Russia's ongoing war in Ukraine.

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Robert Wood, UK economist for Bank of America Merrill Lynch (MLI UK), said this would have to trigger the monetary policy committee into a series of rate rises.

He said: "Inflation will run higher for much longer if recent energy price moves persist, challenging the BoE to hike into a sharply slowing economy."

But the manager added: "We see a second peak of 7.6 per cent in October, assuming the government doubles the utility bill rebate to £400 per household." If the utility bill rebate is not added, the inflation outlook could be even worse.

The Economic Watch stated: "We then see inflation spiking to 7.6 per cent in October as the utility price cap rises another 30 per cent, on our estimates.

"We assume the government doubles the energy price 'rebate' announced last month to £400 off bills in October versus the current £200. Without that additional action we would see October CPI inflation at 8.1 per cent."

While a potentially lower rate of inflation has been predicted for August, this is still at an estimated 6.6 per cent.

In February, FTAdviser reported that retail prices index could even hit a 10 per cent print, with Wood describing the latest inflation data from the Office for National Statistics as being akin to Everest Base Camp IV.

He quipped: "It's a long way up but there is more to come".

At the time, James Lynch, fixed income manager at Aegon Asset Management, warned the UK could see 7.4 per cent CPI and maybe even a 10 per cent RPI as we head into April.