LONDON (CNBC) — UK 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 UK 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, UK 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 UK was likely to fall into a recession in the fourth quarter. It forecast that the UK 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.
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.