Inflation: Falling energy bills and price cap helps drive down prices
Falling energy costs are taming once rampant inflation rates, with the consumer price index rising at its lowest rate since last February.
Danni Hewson, head of financial analysis at AJ Bell, said the latest price cap – now set at £2,074 per year for average energy use – was the chief driver of lower hikes in consumer prices.
“The introduction of the new energy price cap, which reflects falling gas and electricity prices, was always going to impact July’s numbers and has been primarily responsible for the significant fall in the headline rate,” she said.
The CPI has fallen to 6.8 per cent in the year to July, its lowest rate since February 2022 – which has also seen the rate food prices are rising continue to slow, including supermarket staples on the shelves.
“The price of stuff is falling, and the latest producer prices suggest that trend will only accelerate as we head towards the back end of the year,” she said.
Energy bills are expected to fall when the next price cap for the fourth quarter is announced later this month.
This is in line with plummeting wholesale costs across major gas benchmarks – following last year’s rally when UK futures closed in on £8 per therm.
Normally gas trades at around 40-45p on the benchmark, but has remained elevated since the wider energy crisis, now priced at 98.4p per therm.
However Cornwall Insight then predicts them to stabilise at near double pre-crisis levels, following Russia’s invasion of Ukraine and the collapse of 30 suppliers in the domestic market.
With the Bank of England also expected to unveil at least one further interest rate hike, this raises the prospect of further pain for households even as markets calm.
“Whilst the latest headline inflation numbers have finally followed the Bank of England’s repeatedly re-written script, there will be little cause for celebration in the hallowed halls of Threadneedle Street,” Hewson said.