Will higher energy bills increase inflation in 2023?

According to ING analysis, UK inflation could be 3 basis points higher next year following the government’s turnaround on two-year support for energy bills.

It said the average household could spend 10 percent of its disposable income on energy by 2023, although it could be more than 15 percent if natural gas prices bounced back to the peaks reached in August 2022.

If the energy cap had remained, it would have been about 8 percent, although the poorest households would have paid 25 percent with the cap and would probably pay nearly 40 percent without it.

If prices spiked back to August levels, the bank said it could be more than 60 percent of their disposable income.

Newly appointed Chancellor Jeremy Hunt announced yesterday that the £2,500 limit on average household accounts, introduced last month, would be lifted in April 2023, although support may continue for some.

The government initially promised that the ceiling would remain in place for two years, meaning energy bills are now likely to be significantly higher than households had planned from April.

Households that do not have a permanent contract and are not eligible for future support will again be subject to Ofgem’s price cap.

Energy forecasters predict this could be as much as £5,000 a year, again based on normal use.

Higher energy bills have been a major contributor to the rising inflation that has hit the UK economy in recent months, and ING has forecast that removing the government cap would push consumer price index inflation 3 basis points higher than in 2023.

It shows that inflation will fall from its current level of around 10 percent around March, but will rise again in April if Ofgem raises its price cap. ING has forecast that the new limit will be £4,250.

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In July, for example, it could be around 8 percent, compared to 5 percent if the government’s account cap had remained in place. It predicts that the gap will not close again until around April 2024.

James Smith, developed markets economist at ING, said in the report: “Such a blow to disposable income this winter would inevitably worsen what would otherwise hopefully be a fairly mild recession.

The chancellor hopes energy prices will continue to fall, softening the blow to households.

For now, his focus is indeed on lowering the OBR credit estimates as much as possible in the forecast expected for October 31.

He also hopes a scaled back bailout package will reduce the need for the Bank of England to tighten aggressively.

“But in practice – and certainly if gas prices start rising again – we think the Treasury may need to provide additional support in some form before April next year.

For now, however, the Chancellor’s steps will mean that the Bank of England has to be less aggressive. After anticipating a 100 basis point rate hike in November, we now think it’s more likely at 75 bps.’

What happens to the bills after April?

According to Hunt, the government’s energy support scheme will be “assessed” by the Treasury.

It’s not clear what will happen after April, but it has been suggested that the state law subsidy could then become means-tested.

Smith said, “Right now, the government really only has two ways to test its energy price cap.

The most obvious option is to offer all households the same energy price, but temporarily raise higher income tax rates to make the system fairer.

‘That would probably be the most accurate and therefore cost-effective option, but probably politically untenable.

“The alternative would simply differentiate between people with Universal Credit (benefits) — about 15-20 percent of energy-using households — and those who don’t.”

Prior to the announcement of the existing £2,500 average-use limit, the bills for those not on permanent contracts were in line with the energy price cap set by industry watchdog Ofgem.

This would rise from £1,971 a year to £3,549 in October 2022, before the government cap was introduced.

The government limit would therefore have typically saved customers around £1,000 over what they would have paid otherwise.

Ofgem will again review its price cap in April 2023.

Analysts have made several predictions about what the cap could be, based on the current and forecasted future price of wholesale gas.

Energy consultancy Auxilione has calculated that the cap for an average household could reach £5,000, although it said the government will “probably review the price cap before we get there”.

Energy analyst Cornwall Insight has set its figure at £4,348, although he expects the cap to fall after that.

Meanwhile, banking and asset manager Investec’s forecast is £3,900.

In September 2021, Ofgem’s limit was £1,277, meaning that even below the government limit, the average household’s energy bill outside of a fixed deal had doubled in a year.