The new Prime Minister’s plans to freeze energy bills is expected to see inflation peak at far lower levels than previously feared, according to experts.
Economists are forecasting that if energy bills are capped at £2,500 as predicted under the support package, then inflation will now peak at 10% or below in the fourth quarter, having previously warned that it could soar to more than 13% in October.
Allan Monks, an economist at JP Morgan, said he is now forecasting CPI to reach around 9% in the final three months of the year, down from his previous forecast of close to 13%, thanks to the Government’s expected proposals.
The UK energy package should reduce the depth of a winter recession, and would also mean inflation has already more-or-less peaked
James Smith, ING economist
While rises in the cost of living will still be painful and the worst seen for more than 40 years, it is a far cry from the worst case predictions.
Some experts had even forecasted that the Consumer Prices Index (CPI) would soar to 22% in January without any Government intervention.
James Smith, a developed market economist at ING, said he believed the plans could also ease any recession, although it is unlikely to prevent the economy from going into reverse.
He said: “There’s plenty to debate about a blanket price cap, but the obvious benefit is it’s clear and straightforward for consumers and should have a material impact on confidence.
“It should reduce the depth of a winter recession, and would also mean inflation has already more-or-less peaked; January’s inflation rate would be roughly six percentage points lower.”
Deutsche Bank estimates that the support measures could add around £30 billion to £50 billion to gross domestic product (GDP) over the coming years, worth about 1.5% to 2% of output.
It is thought the Bank of England may not need to raise interest rates as high as first thought over the next year or two, if it can rein in the inflation peak.
ING is forecasting that rates may now rise to 3% or a little below, from 1.75% currently.
But policymakers at the Bank are still seen voting for a half a percentage point rise on September 15, to 2.25%, and another rise to 2.75% in November also cannot be ruled out as it looks to contain rampant inflation.
Mr Monks raised concerns that, even with energy prices capped, the Bank will have a battle on its hands controlling wider inflation building up in the economy, in particular as workers demand higher wages.
“While near-term inflation may turn out lower than previously expected, it is likely to be raised over the medium-term as the economy shows greater resilience following the intervention,” he said.
Experts have recently raised worries that Liz Truss’s tax cutting plans could end up stoking inflation in the long run, which the Bank will be keeping a very close eye on.
It will also send government borrowing ballooning even higher than it already is, with Deutsche Bank predicting borrowing will climb back to around 7% of GDP in 2023/24, pushing the deficit to £170 billion this fiscal year and to £180 billion next fiscal year.