As announced by the new Prime Minister Liz Truss this lunchtime, the energy price cap in the UK is set to be frozen at £2,500 from 1 October 2022 for two years. This is Truss’s first major policy announcement, as the UK faces a severe cost-of-living crisis. Ofgem had reported last month that the energy price cap, which is the amount that a typical household pays for energy on a flexible rate tariff, was due to rise to £3,549 in October, an 80% increase on the current cap of £1,971. However, the autumn rise in bills is now limited to a 27% hike. It should be noted that this will still amount to an increase of 96% compared to last winter. The Prime Minister has also announced that there will be six months of assistance for businesses – with a scope to extend support past the six months timeframe for particularly vulnerable sectors, such as hospitality – which is set to provide equivalent support to that which consumers will receive.
Liz Truss faced many calls to help households with energy prices as inflation has rapidly accelerated over the course of 2022 and is set to see further rises. According to a data release from the Office for National Statistics (ONS), UK inflation stood at 10.1% in July, as measured by the Consumer Prices Index (CPI). This marked an acceleration from June’s rate of 9.4% and the highest reading since that of 10.2% recorded in February 1982, over 40 years ago. Our latest forecasts incorporating the expected 80% price cap rise in October and a further increase in January expected inflation to hit 14% in October and almost 15% in January. However, with energy bills making up a considerable portion of a typical consumer’s spending, the new policy will have a sizeable impact on inflation. Our new forecasts, taking into account today’s policy announcement, expect CPI inflation of around 11% in October, which then should slow slightly in January, taking around five percentage points off the expected CPI inflation rate for early 2023.
The exact impacts of the energy package on public finances are yet to be announced, but estimates have suggested that the Government will have to borrow at least £100 billion in order to pay for it. Borrowing is likely to be the source of funding for this new policy, given that the Prime Minister did not announce a rise in taxes in order to cover the costs. To put that in perspective, total public sector net borrowing excluding public sector banks amounted to £132 billion over the 12 months to July 2022, according to ONS data. The new policy will protect millions of households from severe financial strain over the coming months. Although the policy is not targeted, and so will be equally applied to richer and poorer households, it will provide key support that many households will need to make ends meet. It also comes on top of the £400 all households will receive over the six months from October via the Energy Bills Support Scheme. Through a more restricted rise in energy bills, the new policy is also likely to make the expected recession in the UK less extreme. Cebr is currently forecasting the UK economy to grow by 3.0% in 2022, followed by a 0.9% contraction in 2023. However, today’s announcement means that a typical household will have almost £90 a month more to spend each month from October than in the counterfactual scenario without today’s announcement. This boost for households may drive spending across other areas of the economy, limiting the economic contraction expected later in the year and into 2023.
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Josie Dent, Managing Economist Email email@example.com Phone 020 7324 2864
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