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What will the energy price cap do to BOE inflation forecasts?

  • The energy price cap would previously have kept the energy price constant between October 2022 and October 2024. The BOE never actually published any official forecasts under this scenario (their last forecasts were in August), although they did note that they expected inflation to peak around 11% in October.
  • The Bank's forecasts usually assume that energy prices move in line with the market curve over the next six months and then remain constant. And they assume fiscal policy at the time of the announcement.
  • So in the November MPR forecasts, we assume that the Bank of England will now be using the current energy price cap to April 2023, and then will use the market price for April 2023, and keep that constant throughout the forecast horizon.
  • This means that we may see inflation push even higher in April 2023, but at the 2-year horizon inflation is likely to be much lower.
  • We will also have removed the vast majority of the extra stimulatory spending (which again was announced since August MPR forecasts). And we no longer have an income tax cut in April 2024. So the 2-year ahead inflation is likely to have been dragged lower, and inflation over the next six months will be lower, but we could see inflation higher from April 2023 (for the 6-18 month period).
  • This will likely be interpretted differently by different MPC members - upside inflation risks from energy will now be higher than previously expected, but with less fiscal stimulus domestically driven inflation could be lower. The question is how much of the extra energy inflation will passthrough to domestic inflation - something that has been a key point of debate on the MPC for some time and seems likely to lead to more division going forward.

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