Goldman warns UK inflation could top 20% as recession nears

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FILE PHOTO: People walk through the financial district of Canary Wharf, London, Britain, 28 September 2017

LONDON/HONG KONG (Reuters) -Inflation in Britain could exceed 20% early next year if spiralling gas prices fail to come down, economists from U.S. investment bank Goldman Sachs warned, adding that a recession was on the way.

Last week Britain's energy regulator said power bills will jump 80% to an average of 3,549 pounds ($4,188) a year from October, plunging millions of households into fuel poverty and leaving businesses at risk unless the government steps in. [nL8N3020Z2]

"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)," Goldman economists said in a research note.

"(This) would imply headline inflation peaking at 22.4%, well above our baseline forecast of 14.8%."

Last week economists from Citi said consumer price inflation was set to peak at 18.6% in January, more than nine times the Bank of England's target.

Goldman said it expected a recession to begin in the fourth quarter, with the economy set to contract by 0.6% in 2023 as a whole - gloomier than the Reuters poll consensus for growth of 0.2% but less severe than the 1.5% drop predicted earlier this month by the Bank of England.

The BoE looks set to raise interest rates by 50 basis points to 2.25% next month, Goldman said, adding that it saw upside risks to its forecasts for additional 25 basis-point hikes in following policy meetings.

(Reporting by Andy Bruce, Alun John and Tom Westbrook; Editing by William Schomberg and Kim Coghill)