Falling energy prices will ease inflation, reduce peak borrowing costs and boost economic recovery later this year, says a new report.
An exceptionally warm winter in western Europe means the price of gas – now around £1.80 a therm – is lower than before Russia’s invasion of Ukraine almost a year ago.
Demand is also about a fifth lower than expected as cash-strapped consumers cut energy use.
In a report out tomorrow, the Centre for Economic and Business Research (CEBR) estimates that there will be ‘significant’ economic effects if gas prices keep falling as predicted.
The Consumer Prices Index, currently running at more than 10 per cent, could fall by three percentage points more than expected.
‘This would help the Bank of England a great deal in reducing inflationary pressures and could lead to a lower peak in interest rates and less collateral damage in the economy,’ the CEBR said.
Interest rates, currently at 3.5 per cent, are expected to hit 4.5 per cent later this year before falling back.
The impact of lower gas prices may be too late to stave off a technical recession, but it ‘should help boost the expected economic recovery in the second half of the year’, the CEBR said.
Traders are betting that gas prices will fall to around £1.50 a therm by next January, which would mean the energy price cap will no longer cost the Government anything.
If prices had stayed high, the planned rise in the Energy Price Guarantee from £2,500 to £3,000 for an average household would have cost the Treasury £13billion in the next financial year.
The CEBR said the Government could use this windfall to tackle the country’s pressing problems, including ‘an imploding health system’.