AWAVE of concern over the swelling cost of living is sweeping across
The
While tensions between Putin and the West might seem like distant political intrigue found in a tepid spy novel sold at an airport, the reality remains that domestic energy costs are beholden to European political stability.
When relations between
VOLATILE BRANCHING OUT The
But, its primary source of renewable energy is wind power, which is volatile at best. During an unseasonal windless winter it has underper-
The energy market is highly inefficient due to the intrusion of government policy.
Firms are rigidly constrained by a price cap that often causes them to produce energy at a loss, the primary reason why a wave of suppliers have gone to the wall.
SMALLER FIRMS TAKE A BLOW Bulb, the
Weak oversight by the watchdog Ofgem has allowed nascent firms led by people inexperienced in the energy market to flood the space.
As a result, smaller energy firms failed to hedge properly in a desperate push to chase customers, leaving them exposed to sharp rises in gas prices.
The energy crisis has already hit millions of Brits, but is set to hit more still.
Fund manager
The price cap was increased 12 per cent last October. Ofgem is set to announce its next on 7 February, with City analysts expecting it to climb by at least 50 per cent this time.
Hiking the energy price cap will exert an enormous amount of upward pressure on inflation in the
In fact, most City economists, and even the
Nonetheless, the Bank has bet on in- flation peaking at six per cent this April, when Ofgem's price cap decision will take effect.
However, experts in the City think the Bank has undershot its inflation estimates and expect the energy watchdog to raise the cap even further.
Consultancy Pantheon Macroeconomics set out several scenarios, each examining how inflation could move depending on the scale of the price cap hike.
THE YEAR OF SQUEEZE In a rosier prediction, Ofgem lifts the cap 46.5 per cent, pushing inflation to 6.2 per cent. However, in a bleaker scenario, the cap is hiked 54 per cent, hoisting inflation to 6.4 per cent.
Investment banking giant Goldman Sachs also reckon the price cap could rise as much as 50 per cent, but warn the cost of living will rise to 6.8 per cent, the highest level in recent history.
The burden of a higher cost of living will predominantly fall on lower income households as they tend to spend a greater proportion of their income on essentials. However, wealthier households will absorb a further shock from the looming 1.25 percentage point increase in national insurance contributions as they tend to have higher employment rates.
The corrosion of Brits' finances is therefore widely distributed, casting doubt over whether consumer spending can power the
Household budgets for spending on non-essential goods will shrink as they divert more money toward paying higher energy tax bills.
The
Wealthier households will be hit not just by an energy hike but by an impending tax rise
(c) 2022 City A.M., source