UK energy bill help won't lower inflation

UK government energy bill rebates for households cannot be viewed as lowering inflation, official statisticians said on Wednesday, ruling out the possibility of a modest reduction to rates of price growth that are running at 40-year highs.

Economists and bond investors had been looking closely at whether statisticians would classify the support packages as price cuts for consumers that would directly lower headline inflation rates – and with it debt interest costs for the government arising from inflation-linked bonds. However, the Office for National Statistics (ONS) ruled that the Energy Bills Support Scheme (EBSS) should be treated as increasing household income rather than reducing their expenditure.

“Therefore… the payment will not affect either the Consumer Prices Index including owner occupiers’ housing costs (CPIH), the Consumer Prices Index (CPI) or the Retail Prices Index (RPI),” the ONS said in a statement.

Economists had widely expected such a decision after the ONS ruled similarly on how to treat a government rebate for council taxes during the COVID-19 pandemic.

British consumer price inflation hit a 40-year high of 10.1% in July – more than five times the Bank of England’s 2% target.

“Had the EBSS been classified as a price cut, this might have pushed the targeted measure of inflation down by roughly 0.3%-0.4% for six months,” said Philip Shaw, chief economist of Investec bank.

“It is important to note that today’s ruling has no impact on the direct position of consumers.”

Earlier this week Goldman Sachs said inflation could top 22% early next year if spiralling gas prices fail to come down, although its base case was for a peak of 14.8%. read more

Announced in May when energy price forecasts were much lower, the EBSS comprises 400 pounds ($470) of discounts on household bills, paid in installments over six months starting in October.

The two candidates to become Britain’s next prime minister – Foreign Secretary Liz Truss and former finance minister Rishi Sunak – have clashed over how to respond to soaring energy prices, with the front-runner Truss initially saying she would rather cut taxes than give “handouts”.

Both contendershave acknowledged that the poorest in society will need support.

The leadership race ends on Monday.