MNI BRIEF: UK Govt Energy Plan To Also Cap Peak CPI Rate

New UK Prime Minister Liz Truss announced a price cap that would curb the expected rise in average yearly household energy bills to GBP2,500, well below the level the Bank of England had previously assumed in its inflation projections. Truss said the plan could knock as much as 5 percentage points off of assumed near-term peak inflation.

The BOE's August Monetary Policy report projections were based on the typical annual fuel bill rising to GBP3,500 in October. In the August MPR headline CPI inflation was forecast to rise to just over 13% in Q4 and to stay well above the 2% target during much of 2023 before dropping back to target two years ahead (MNI STATE OF PLAY: BOE Hikes 50bps, Stresses Uncertain Outlook). The government announcement will lower the inflation peak, Bank Chief Economist Huw Pill said Wednesday, but in evidence to the Treasury Select Committee he stressed that what matters more for policy setting is inflation further down the line, with policy changes taking 18-24 months to come through in full, and the extra support to households should feed through to higher than previously expected discretionary spending.

Truss said that the estimated cost of the energy package would be revealed in a fiscal statement later this month. She said they would attempt to offset the package's costs by "ramping up supply" and negotiating new energy contracts. Early forecasts from analysts suggest the cost could approach GBP150 billion. Sterling recovered some of its early weakness as Truss spoke, recovering to 1.1540 versus the U.S. dollar from a session low at 1.1475.