The UKs ã12 Billion UK Call May Be About to Jolt Inflation's Path
Comment of the Day

August 30 2022

Commentary by Eoin Treacy

The UKs ã12 Billion UK Call May Be About to Jolt Inflation's Path

This article from Bloomberg may be of interest to subscribers. Here is a section:

Deutsche Bank estimates that subtracting the rebate will reduce the Retail Prices Index, which determines payments on UK inflation-linked debt, by about 2.7 percentage points. That would lower the debt interest bill by around £14 billion this year, according to Bloomberg calculations based on Office for Budget Responsibility data. RPI is also tied to some consumer products, such as mobile phone tariffs.

Such savings would be welcomed by the government, which is under intense pressure to spend even more in response to the surge in energy costs. A similar reduction in the Consumer Prices Index, and a potentially lower path for interest rates as a result, could also save the government billions.

Based on CPI, UK inflation is already above 10%. The Bank of England forecasts that it will top out just above 13%, although a surge in gas prices in recent weeks mean officials will almost certainly have to increase that forecast. That means the ONS decision may impact the peak rate this winter, but not change the direction of the outlook for prices. 

Eoin Treacy's view

Persistent inflation has a long tail. The longer it lasts, the greater the effects for government finances in future. Index-linked pensions, tariffs and utilities all push higher with a lag from a current bout of inflation. That’s both a near-term headache and medium-term challenge for most governments. That greatly increases potential for government intervention. It is starting with subsidies and will quickly transition to price caps if prices fail to decline.  

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