Energy scenarios shape BoE outlook – ING

ING‘s James Smith outlines scenarios for UK inflation, with current energy prices implying a brief 4% peak in autumn and ING’s base case of easing disruption pointing to a 3.5% peak in September. He notes inflation should fall near term, with Ofgems July cap change key, and sees 2025 as the better guide to economic response.

Energy paths drive inflation projections

“In terms of timing, pretty much whatever happens, inflation is likely to fall back in the very short term. The Ofgem household energy price cap won‘t be updated again until July, which is the earliest point we’ll see the true impact of higher natural gas prices (and the impact on electricity costs). Current wholesale prices are consistent with roughly a 25% increase in energy bills in July.”

“Before then, we expect headline CPI to drop to 2.3% in April from 3% in February, as a whole raft of changes made at the start of the last financial year drop out of the annual comparison. Notably, this Aprils rise in water/sewerage bills is much less dramatic. Services inflation should drop by upwards of one percentage point, from 4.3% last month.”

“At current energy prices – oil at 100 USD/bbl and TTF natural gas at 50-55 EUR/MWh – UK inflation would likely peak briefly at 4% in the autumn. Alternatively, under ING‘s energy base case, where disruption starts to ease through 2Q and energy prices begin to gradually fall back, we’d expect a peak of 3.5% in September.”

“For context, that is a percentage-point higher than we had anticipated before the war began. That is not a game-changer for a central bank that was otherwise ready to cut rates at the March meeting, particularly when set against the wider context of a fragile jobs market.”

“We think 2025, not 2022, is the playbook for how the economy is likely to respond to the current crisis.”