Economists have said that new Prime Minister Liz Truss’s plan to freeze soaring energy bills could curb inflation in the UK over the coming months.
The price cap is expected to be announced on Thursday and is expected to freeze average energy bills at around £2,500 a year.
Shares in pub owners such as Whitbread (GB:WTB) and Wetherspoons (GB:JDW) rose in early trading on the news.
UK inflation ‘could have peaked’
Speaking to MPs, the Bank of England’s Chief Economist Huw Pill said that the move could lower headline inflation.
Pill said, “One of the things that does seem to be under consideration is a change to the relationship between gas prices and retail gas prices in a direction that will lower headline inflation, relative to what we were forecasting, where that relationship was based on the mechanics of the Ofgem price gap.”
“So I think that in the short term it would tend to weigh on inflation. Net-net on the implications for headline inflation in the short-term, I would expect that to see a decline.”
UK interest rate rises ahead?
But Pill, a member of the Monetary Policy Committee which sets interest rates, declined to speculate on whether the move might have an impact on the bank’s monetary policy. .
He said, “I think that not only does it depend on the macroeconomic effects of the various fiscal changes that could be envisaged, but I think there is just too much uncertainty to have a strong view right now, given the lack of details.”
Other economists suggested that the move meant that inflation in Britain will already have peaked.
Elizabeth Martins, UK economist at HSBC said, “Cancelling all or most of the planned October and January prices rises … could be a gamechanger in our view.
“It would mean that, on a mechanical basis, inflation might already have peaked.”
Last month, Goldman Sachs warned that Inflation could hit 22.4% in 2023 if prices for natural gas remain as high as they currently are.
The Bank of England’s Monetary Policy Committee is due to have its next interest rate meeting on September 15.
The National Institute of Economic and Social Research warned last month that the Bank of England would need to raise interest rates to 3% to bring down inflation.
Another 21 economists suggested that the bank would raise interest rates by 0.25% in September – after a 0.5% raise in August.
British consumer price inflation rose to 10.1% in July, up from 9.4% in June, in the highest figure since February 1982, according to the Office of National Statistics.
