Soaring interest rates fear over 18.6% inflation forecast sparks new Scots call for urgent action

It has led to urgent new calls for action in from Citizen Advice Scotland to prevent a loss of life in the crisis.

Citi also predicted that that the energy bills price cap would be raised to £4,567 in January and then £5,816 in April, compared with the current level of £1,971 a year.

Those were shifts that it said would lead to inflation “entering the stratosphere”.

It would also take inflation to its highest level since inflation hit a record level of over 24% in 1975.

Then, the Prime Minister was Harold Wilson and came amidst criticism that the Labour leader's "social contract" with trade unions for voluntary wage restraint had virtually collapsed.

Wage rates for manual workers had then been rising at an annual rate of 31.7% while average earnings for all employees were up by about 28% a year.

It would also be higher when inflation hit 17.8% in 1979 when the UK was hit by another energy crisis caused by a drop in oil production in the wake of the Iranian Revolution.

Citizens Advice Scotland chief executive Derek Mitchell said of the predictions: “This is simply unsustainable for people who are hanging on by their fingertips right now, more big increases in prices and bills will drive people into poverty, debt and destitution.

“This cost of living crisis is going to cost lives without urgent and radical intervention from government on the scale of the 2020 pandemic or the 2008 financial crisis. People will freeze or starve unless they get help."

Benjamin Nabarro, chief UK economist at Citi indicated that the forecasts for inflation could lead to the Bank of England to raise base interest rates even higher than they currently are.

Earlier this month they went from 1.25% to 1.75% in a bid to curb soaring prices. In November the base rate was at 0.1%.

It was the biggest single rise since 1995 and means interest rates are now at the highest level since January 2009.

Some are expected another big move in interest rates when the Bank of England's Monetary Policy Committee (MPC), makes its next scheduled policy announcement on September 15.

Analysts Moneyfacts say homeowners have suffered a £200-a-month increase to their mortgage repayments as interest rates have hit a near 10-year high.

The average rate for a two-year fixed-rate mortgage has hit 4.09pc, its highest recorded level since February 2013.

A year ago the average two-year fixed rate was available at a rate of 2.45%. This means the average monthly repayment on a £250,000 mortgage will have increased from £1,115 to £1,332 in the last year, a rise of £217 a month.

"The question now is what policy may do to offset the impact on both inflation and the real economy," Benjamin Nabarro, chief UK economist at Citi said.

"Should signs of more embedded inflation emerge, we think a bank rate of 6-7% will be required to bring inflation dynamics under control. For now though, we continue to think evidence for such effects are limited with increases in unemployment still more likely to allow the Monetary Policy Committee - of the Bank of England - to pause around the turn of the year," he added.

The US banking group is highly regarded for its economic forecasting, working with the Institute for Fiscal Studies think tank on its regular “green budget” analysis.

Last week the UK inflation rate hit double digits - 10.1% - a higher rate than analysts were predicting. The last time price rises were in double digits was in February 1982.

Rising food and drink prices made the biggest contribution to the change in the inflation rate between June and July Bread, cereals, milk, cheese and eggs had a particular impact on rising prices.

But the cost of living is rising across the board, driven partly by energy costs and the Ukraine war but also factors such as the cost of raw materials.

Meanwhile, average wage increases are falling behind, with the average salary buying 3% fewer goods and services than a year before.

The Bank of England said that inflation was to continue rising this year, with the Bank of England predicting it won't go down to the target of 2% for about two years.

Earlier this month the Bank of England forecast that UK inflation will peak over 13% this autumn when the energy price cap is lifted while the Resolution Foundation think tank has forecast it could reach as high as 15% by early 2023.

The Citi predition for inflation would hit household incomes even harder and further push the UK economy into recession.

The energy regulator Ofgem is on Friday expected announce the energy bills price cap for the period between October and January, which most analysts expect to rise to around £3600 - over 80% more than current levels.

Mr Nabarro said the forecasts had taken into account a 25% rise increase in wholesale gas prices last week and a seven percent increase in wholesale electricity prices.

“Even with the economy softening, last week’s data reaffirmed the continued risk of pass through from headline inflation into wage and domestic price setting could accelerate,” he said.

Conditions in the gas market worsened yesterday in response to Russian state-owned operator Gazprom announcing unscheduled maintenance on the Nord Stream 1 gas pipeline into Europe.

The price of gas for next-day delivery to the UK shot up 37% to 495p a therm at one point, the highest since March. The month-ahead gas price touched record highs, up 16% to 540p a therm.

The government is examining options to tackle the crisis including ramping up an existing support package, which gives £400 to every household from October, and a “tariff deficit scheme” pushed by suppliers.

Bill Bullen, the chief executive of Utilita, yesterday called on the Conservative party to end its leadership contest early so that the energy crisis could be tackled immediately.

Citizens Advice Scotland said that it is already seeing an increase ahead of a “toxic cocktail” this winter of soaring energy bills, growing inflation and higher interest rates – and raised concerns about how people will manage later in the year.

The latest CAS quarterly cost-of-living analysis, which looks at the demand for advice, noted “significant growth” for demand for cost-of-living related advice within areas such as utilities and food insecurity.

Comparing the first quarter of this year to the financial year of 2021/22 as a baseline, demand for cost-of-living utility advice was up from 26% to 35%, while demand for food insecurity advice was up from 36% to 45%.

Views of the online advice page “struggling to pay your energy bills” were up 120% and views of the online advice page “Get help with bills” has increased 119%.

Meanwhile, chief executives of the UK’s 100 biggest companies have seen their pay jump by 39% to an average of £3.4m, according to research by the High Pay Centre thinktank and the Trades Union Congress (TUC).

The median average pay of chief executives of companies in the FTSE 100 index rose to £3.4m in 2021, compared with £2.5m in 2020 during the height of the coronavirus pandemic when many bosses took a voluntary pay cut as they placed millions of employees on furlough. CEO pay has also surpassed the £3.25m median recorded in 2019, before the pandemic.

The jump in executive pay means that the average UK chief executive now collects 109 times that paid to the average British worker, up from 79 times in 2020.