Average household energy bills will be frozen at £2,500 from 1 October after the government stepped in to alleviate some of the pressures of the cost-of-living crisis on UK households.
The current price cap of £1,971 was expected to reach £3,549 next month before prime minister Liz Truss today announced the ‘energy price guarantee’ in her second day in office.
Inflation in the UK reached its highest level for more than 40 years in July as the consumer price index (CPI) rose 10.1%, and energy bills have had some of the largest cost increases.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said that today’s announcement “will give some certainty for those worried about escalating fuel bills this winter”, but financial pressures will continue to plague households through the rest of the year.
She added: “This comes as little comfort to those already struggling to make ends meet and the reality is, we still face a long hard winter with many pensioners facing difficult decisions about how they manage their fuel bills alongside soaring food prices.”
The cost-of-living crisis may be far from over, but Hugh Gimber, global market strategist at J.P. Morgan, said that “an immediate response was absolutely essential to shield consumers and corporates from the full effects of this shock”.
This cost freeze could be helpful in subduing the rapid rate of inflation but does make the possibility of the Bank of England increasing rates at next week’s Monetary Policy Committee far more likely.
Gimber added: “The Bank of England will likely still feel under immense pressure to prove its commitment to returning inflation, and a 75 basis point rate hike next week is a very real possibility.”
Although the new price cap will help remove some of the stress around high energy bills, UK taxpayers may have to pay more for doing so.
Bills may be capped at a max amount for now, but the government will have to pay energy companies the excess, which could be reflected in higher taxes later down the line.
Tom Gilbey, equity research analyst at Quilter Cheviot, said: “Whilst it is positive that help is being given, it is unclear who is going to have to pay for this bill which might cost up to £150bn.
“Considering Truss won her bid to be prime minister on the notion that she wants to lower taxes, it is unclear how this will be squared away considering the debt already taken on during the pandemic.”
He added that although the response by the public right now has been one of relief, the price cap’s popularity may sour once households are hit with higher taxes.