The key driver of UK inflation is rising energy bills and the soaring price cap, as Russia’s prolonged invasion of Ukraine continues to impact on the supply of gas on a global scale.
This in part caused inflation in the UK to peaked at a whopping 10.1% in July, as the price of food, drink, fuel and energy continued to outstrip earnings on a large scale.
According to the most recent reports, the energy price cap could peak above £3,300 this winter. But what does this mean for the country and its poorest citizens?
The Energy Crisis – What We Know So Far?
In truth, Russia’s invasion of Ukraine has exposed the lack of energy security that exists in the UK and Europe, with most continental nations relying on the eastern bloc country for much of their gas supply.
While the UK is in a favourable position when compared with most EU countries (largely because it doesn’t benefit from a direct supply line or source from Russia), it still faces issues of scarcity and supply.
Should Russia respond to international sanctions by cutting off its gas supply lines completely, for example, the subsequent shortage could see “significant unmet demand” and widespread shortages.
For now, however, wholesale gas prices are soaring in line with a diminishing supply, creating a scenario where the energy price cap (which sets the maximum figure that can be charged to customers on a variable dual-fuel rate for six months) will continue to see considerable hikes.
How High Will the Price Cap Go?
So far, energy firms have been quick to pass the rising cost of energy onto customers, with the energy price cap on course to hit £3,244 per annum in October.
This translates into an average monthly bill of £270.33 for households, representing an 82% price increase for most families in the UK since the beginning of 2022.
What’s more, the default tariff cap is expected to rise again in January, albeit at a much slower rate. However, a projected increase to £3,363 per annum is considerably higher than the £3,003 forecast issued just weeks before by Cornwall Insight, so there’s scope for the price to rise even more exponentially in the near and medium-term.
By this stage, inflation will have already peaked above 13%, and the Bank of England (BoE) estimates that such prices won’t be stabilised or returned to normal until late in 2024.
What Does This Mean for Low Earners?
Of course, such economic volatility can be good news for investors and seasoned traders, particularly those who leverage speculative vehicles such as spread betting to trade price shifts.
However, the outlook is much bleaker for the poorest households in the UK, despite the initial package of support that has been proposed by the government.
According to the UEA’s Dr David Deller, energy affordability difficulties could reach a level not seen since the last 1980s, creating a scenario where many low-income households will be unable to afford their bills and faced with either heating their homes or stocking the cupboards with food.
This is surely inevitable as prices continue to rise, which is why Labour (and the Liberal Democrats) have proposed scrapping the next energy price cap hike and implementing a proactive windfall tax on high profit energy firms.
This type of actionable and more drastic measure may be required in the coming months, particularly if the poorest in society are to be insulated against rampant price hikes.