British consumer price inflation is set to peak at 18.6% in January, more than nine times the Bank of England's target, an economist at US bank Citi said, raising his forecast once again in light of the latest jump in energy prices.
"The question now is what policy may do to offset the impact on both inflation and the real economy," Benjamin Nabarro said in a note to clients.
Consumer price inflation was last above 18% in 1976.
The front-runner to become Britain's next prime minister, Liz Truss, was likely to come up with measures to support households that would have a limited offsetting impact on headline inflation, Nabarro said.
More Persistent Inflation
With inflation now set to peak substantially higher than the Bank of England's 13% forecast in August, its Monetary Policy Committee was likely to conclude that the risks of more persistent inflation have intensified, the note said.
"This means getting rates well into restrictive territory, and quickly," Nabarro said.
"Should signs of more embedded inflation emerge, we think 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 MPC to pause around the turn of the year," he added.
The BoE announced a rare half percentage-point interest rate increase earlier this month and investors expected another big move when the MPC makes its next scheduled monetary policy announcement on 15 September.
Nabarro said he expected Britain's retail price index - which is used to set the return on inflation-linked bonds – would peak at over 20%.
Read More: UK Consumer Sentiment Hits Record Low As Inflation Soars: GfK
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