Energy bills could be about to turn three years of painflation on its head

The new energy price cap from Ofgem comes into effect on 1 April.

But far from an April Fool’s joke – this change could have a big impact on the narrative around inflation in the UK.

We’ve lived with painfully high price increases for more than two years now.

The first indication that inflation was moving above the Bank of England’s target was May 2021 – just shy of three years ago.

But this narrative could finally be about to turn thanks to Ofgem – which sets the price cap on energy bills.

There’s lots of predictions out there but I’ll cherry pick one from the boffins at ING for starters: James Smith, their developed markets economist, sees inflation falling to 1.5% by June – thanks in large part to the shift in the energy price cap.

This is interesting for a couple of reasons.

Firstly, it’s a bit of an indictment into how much of an impact the price cap has on headline inflation figures. To be sure, energy is a really important part of the economy as it feeds into so much else.

But there’s increasing discussion (rightly so in my opinion) on whether the cap is fit for purpose. Suggestions, for instance, that the price cap could become dynamic and change depending on time of day and usage levels sound dangerously as if the regulator might soon accept that having a quarterly-changing price cap doesn’t work and the market should try and set prices “dynamically” as they say.

But we’re not quite there yet philosophically speaking.

To the second interesting point I have to refer to my original thesis – the narrative around inflation is about to change quite significantly. 

Inflation potentially below target starts to look like a problem that the Bank of England’s monetary policy committee might want to try and resolve. To do this it would have to cut rates – or at least consider softening their language around rates.

A rate cut would have all sorts of potential impacts on our economy. Equities would love it, as would bonds. House prices will get a sugar rush as mortgages get cheaper, and savers will get a shoeing.

I’d imagine we’re a long way off from the heady days of 0.25% base rate. Indeed I doubt we will see those levels ever again (and no bad thing if you ask Edward Chancellor).

Ultimately the cost-of-living damage is already done. While price rises might slow substantially, we all feel it tangibly every time we go to the supermarket, or fill up our cars, or try to take a holiday somewhere modestly nice. 

Going forward this might not seem such of a shock. Unless you’re a chocolate lover (like me and my wife!).

What’s coming up in April

Aside from the price cap change on 1 April, the tax year ends on 5 April. 1 April is also April Fool’s Day, Easter Monday and the new National Living Wage and National Minimum Wage level kicks in. A real bumper Monday!

The new tax year on 6 April brings some interesting changes in National Insurance and the end of the pensions lifetime allowance.

Monthly GDP from the Office for National Statistics reports on 12 April, employment and wages are on 16 April while inflation falls (teehee) on 17 April.

Happy Easter and here’s hoping for April showers that are few and far between.

All the best from everyone at MRM and Mouthy Money.