Goldman Sachs warns UK inflation could hit 22% in January; German inflation at near 50-year high – business live | Business

Sticking with the rising cost of living…. Goldman Sachs has predicted that UK inflation could hit 22% next year, if spiralling gas prices fail to fall back.

In a note on Monday, Goldman economists led by Sven Jari Stehn said that if prices stayed at current peaks, the UK will be forced to increase its energy cap by a further 80% in January.

That would be on top of October’s 80% increase in the cap, which is lifting average dual fuel bills to £3,549 per year.

If it happened, Goldman calculates it would push inflation to 22.4%, a really grim outcome, and and trigger a 3.4% decline in GDP.

Even if energy costs moderate, as Goldman’s commodities analysts expect, UK inflation could still peak at 14.8% in January, up from 10.1% last month.

They wrote:

Wholesale gas prices in the UK have surged by 145% since the start of July, and while our commodity strategists do not expect the recent spike in European gas prices to persist, we view persistently higher gas prices as an upside risk to our forecast for the Ofgem price cap increase in January.

Indeed, in a scenario where gas prices remain elevated at current levels, we would expect the price cap to increase by over 80% in January (vs 19% assumed in our baseline), which would imply headline inflation peaking at 22.4%, well above our baseline forecast of 14.8%.

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That baseline forecast would still be bad enough to push the UK into recession (which Goldman is predicting will take place, see earlier post).

The good news is that UK gas prices are still falling today, but it shows just how awful the winter could be for households and businesses.

Last week, economists from Citi said consumer price inflation was set to peak at 18.6% in January, when energy bills rise.

Inflation in Germany has accelerated this month, as consumers are hit by soaring costs of energy, food and goods.

Consumer prices in Europe’s biggest economy, calculated on an EU-harmomised basis, jumped 8.8% from a year ago in August, up from 8.5% in July, according to estimates from statistics body Destatis.

That beats the near-50 year high set in May, when harmonised inflation hit 8.7%.

On a non-harmonised basis, German consumer prices jumped by 7.9% in the year to August, up from 7.5% in July, and matching May’s reading.

Energy prices were 35.6% higher than a year ago, while food cost 16.6% more, Destatis reports, adding:

Energy prices, in particular, have increased considerably since the war started in Ukraine and have had a substantial impact on the high inflation rate.

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Such high inflation in Europe’s largest economy adds to the pressure on the European Central Bank to raise interest rates sharply when it meets next week, following its first rate rise in a decade in July.

Here’s some reaction to the jump in credit card borrowing last month:

Myron Jobson, Senior Personal Finance Analyst, interactive investor, warns that the pressure on household budget will get even worse:

“Vulnerable consumers living on a bare bones budget simply cannot make any further cuts to expenditure to weather escalating cost of living pressures – this is, in part, why we continue to see high levels of consumer debt.

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“The annual growth rate of credit card borrowing has soared to its highest levels in 17 years amid the worst cost of living crisis in generations. July was a particularly agonising month for our back pockets, with inflation hitting double digits for the first time in 40 years. The cost-of-living crunch is set to go from bad to worst with the recently announced heightened energy price cap for October set to throw household budgets into disarray. Meanwhile, rises in food and petrol and other areas of expenditure is set to tighten the squeeze on households budgets.

“Those with high levels of debt should consider what they can do now to reduce their debts as the cost of credit is only rising just as the prices of everyday essentials are flying.”

Alice Haine, personal finance analyst at investment platform Bestinvest, said some people are turning to credit to handle soaring inflation, painfully high energy bills, and falling real wages.

“The rise in consumer credit borrowing reflects just how strained people’s finances are now becoming amid the cost-of-living crunch.

“Savings built up during the pandemic are being used up and people are now turning to credit to maintain their standard of living as soaring inflation, painfully high energy bills and falling real wages eat into disposable incomes.”

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Gabriella Dickens, a senior UK economist at Pantheon Macroeconomics, warns that access to credit might be squeezed soon too:

“The incentive for households to use their savings to pay off debt, instead of supporting their consumption, will grow as interest rates continue to rise.

“Access to credit also might tighten if the unemployment rate starts to increase soon.”

Oil prices are sliding today, on concerns that global demand will be hit as economies slide towards, or into recession.

Brent crude has fallen 4% today to around $101 per barrel, as economists predict that the energy crisis will drive the UK and eurozone economies into downturns.

Fed chair Jerome Powell’s determination to press on with higher interest rates to battle inflation could also lead to slower growth.

Reuters flags that Iraq’s oil exports are unaffected by the current political turmoil in the country, according to three sources, which could ease supply worries as clashes between Shi’ite Muslim groups continue.

Supporters of Shi’ite cleric Moqtada al-Sadr, a former anti-U.S. insurgent leader, have surrounded the Majnoon oil field in Basra since Monday evening as well as the 210,000 barrel per day (bpd) Basrah refinery, according to two sources.

Oil had jumped to a one-month high yesterday, so the market remains volatile.

Indian tycoon Gautam Adani named world’s third richest person

Rupert Neate

The Indian tycoon Gautam Adani has been named the world’s third richest person with an estimated $137bn (£117bn) fortune and becomes the first Asian person to break into the top three of world’s wealthy.

Adani, 60, who founded the mining-to-energy conglomerate Adani Group after dropping out of university, was on Tuesday ranked third on the daily-updated Bloomberg Billionaires Index.

His wealth has soared by $61bn so far this year, according to the index, as the market value of many of his companies have grown. Many of his businesses are involved in natural gas, coal mining and electricity generation, and are likely to have benefited from the global energy price surge.

Adani took the third spot after leapfrogging Bernard Arnault, the French billionaire who owns most of the luxury brand portfolio LVMH.

The only people richer than Adani are Tesla boss Elon Musk with an estimated $251bn fortune and Amazon’s Jeff Bezos with $153bn.

Rob Davies

Journalists at newspapers including the Daily Mirror and Daily Express could go on strike this Wednesday, after talks with the publisher, Reach, over the weekend failed to resolve a stalemate over pay.

Reach journalists last week called off industrial action at the 11th hour, averting a strike scheduled for Friday, after the company asked for further negotiations.

But bank holiday weekend discussions between the newspaper group and the National Union of Journalists (NUJ) made no progress, ending with the company resisting the union’s demand for an improved pay settlement.

More here:

UK gas prices are also falling this morning.

The day-ahead price of UK wholesale gas has dropped by over 20% to 450p per therm, while the month-ahead contract us down over a quarter.

The Dutch wholesale gas price, a benchmark for Europe, has also fallen back, despite Gazprom cutting supplies to French utility Engie this morning.

It’s an encouraging sign, although prices are still painfully high, as Gazprom prepares to close its Nord Stream 1 pipeline this week for three days of maintanance.

UK households are loading up their credit card debt at the fastest rate in almost 17 years, as the cost of living squeeze tightens.

Consumers borrowed an extra £700m on their credit cards, an increase of 13.0% in the 12 months to July.

That’s the fastest increase in credit card borrowing since October 2005, new data from the Bank of England shows.

People are having to borrow more, at a time when inflation has hit a 40-year high over 10% driven by essentials such as energy and food.

Paul Heywood, chief data and analytics officer at credit scoring agency Equifax UK, explains (via Reuters):

“The most vulnerable have run out of quick fixes, which is why we continue to see considerable growth in demand for credit.”

Paul Dales of Capital Economics says the increase shows that consumer spending is not collapsing:

Some of the increase in consumer credit in July may be because some households are already turning to borrowing to make ends meet. But it is more normal for overall consumer credit to weaken during economic downturns.

Admittedly, as these data are in nominal terms, they are being supported by the rise in prices and are therefore perhaps suggesting that consumer spending is more resilient than it really is.

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Overall, consumer credit increased to 6.9% in July – the highest rate since March 2019 – with households borrowing an extra £1.4bn during the month, down from £1.8bn in June.

Mortgage lending for house purchase held broadly steady at 63,770, above forecasts of a drop below 62,000.

European benchmark electricity prices have eased off their record highs this morning, after the EU said it was preparing an “emergency intervention”.

The German one-year ahead electricity dropped to around €600 per MWh this morning, having hit an unprecedent – and astonishing – peak over €1000/MWh yesterday.

Ursula von der Leyen’s declaration that Brussels could cut the price of electricity by separating it from the soaring cost of gas [see opening post for explanation] seems to have calmed the market.

Additionally, there are reports that the EU is set to meet its gas storage filling goal two months ahead of target.

That would help the region cope with a tough winter, with Russia limiting supplies (including squeezing Engie this morning) and energy prices raging.

Bloomberg has the details:

Reserves in the EU were filled up to 79.4% as of Aug. 27 compared with the target of 80% by Nov. 1, according to Gas Infrastructure Europe inventory data.

The EU bolstered its storage rules earlier this year after levels last winter turned out lower than in past years, particularly in German sites controlled by Russian exporter Gazprom, a factor that added to sharp increases in energy prices.

European wholesale electricity prices are still at extremely high levels. Twelve months ago, German year-ahead electricity cost around €74 per MWh.

But at least prices have moved in the right direction for businesses and households today: