Monetary Policy

Nationalisation and freezing energy bills not the answer to rising inflation

Commenting on the latest ONS inflation statistics, Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, said:

“The Consumer Prices Index (CPI) measure of UK inflation jumped to 10.1 per cent in July, from 9.4 per cent in June, which was even worse than expected. Inflation was led this month by food and non-alcoholic beverage prices (where the annual rate hit 12.7 per cent, up from 9.8 per cent).

“The expected increase in the Ofgem cap on domestic energy bills is likely to pull inflation to about 13 per cent in October (depending also on what offsetting measures the government takes, and how the official statisticians treat them when calculating the CPI).

“That should be the peak, and inflation will then fall sharply. Global business surveys already show that supply problems and some of the pipeline cost pressures are easing.

“With the crucial exception of natural gas, global commodity prices have begun to fall, including crude oil and many agricultural commodities. Even if some prices remain high, the much larger increases a year earlier will drop out of the annual comparison.

“Nonetheless, the ‘core’ inflation measure (excluding food and energy) also picked up again in July, from 5.8 per cent to 6.2 per cent, and has averaged 6.0 per cent over the last four months. This will add to concerns that UK inflation may remain higher for longer.

“In the meantime, there will be a further squeeze on real incomes over the winter.  One option would simply be to freeze energy bills, but this would prevent price signals from working properly, and most of the benefit would go to richer households who use more energy.

“Nationalising the ‘Big 5’ energy suppliers would be a complete waste of time and money, not least because a state-owned firm would still have to pay global prices.

“A better solution would be to top up household incomes with some combination of tax cuts and targeted increases in benefits. Looser fiscal policy would also support economic growth and protect jobs, while making it easier for the Bank of England to raise interest rates to more sensible levels.”


Notes to editors

Contact: [email protected] / 07763 365520IEA spokespeople are available for interview and further comment.