UK cost of living squeeze faces double whammy on Thursday

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(Bloomberg) – Britons are about to find out how much the cost of living will rise, how painful the squeeze on incomes will be this year and what the government plans to do about it.

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Energy regulator Ofgem is expected to announce the biggest increase in household energy bills on record at 11 a.m. in London on Thursday. An hour later, the Bank of England is expected to respond to the highest inflation in 30 years by making the first consecutive rate hikes since 2004.

Both decisions will highlight a cost of living crisis that has quickly moved onto the political agenda, forcing a response from Prime Minister Boris Johnson’s government. Ministers are set to unveil a multibillion-pound package of measures to protect households from the hit.

“People are looking at everything going up – prices, interest rates, even taxes – which is a problem for households,” said George Buckley, European economist at Nomura. “And this is a problem for the government, which will have to act.”

The central bank is alarmed that inflation jumped to 5.4% in December and will likely rise to more than triple the rate of its 2% target. Investors and economists expect the key rate to reach 0.5%. That’s the threshold at which policymakers can start trimming the 895 billion pound ($1.2 trillion) portfolio of assets, which has ballooned during more than a decade of stimulus to cut borrowing costs of the market.

Johnson himself has drawn attention to the plight of consumers, telling reporters on a trip to Essex that “we all understand the pressures the cost of living crisis is putting on people” and that the Chancellor of the Exchequer Rishi Sunak is developing measures to help.

Government ministers have been in talks with energy suppliers for months over how best to contain the hit that household budgets will take when the regulated bill cap, a limit on how much suppliers can charge households , will increase on April 1. Ofgem is expected to announce a 50% increase, or £650, for a total of £1,924 per year on average. Consumers as a whole would pay £18 billion more.

The centerpiece of the government support package is likely to be a state-guaranteed loan scheme, according to companies and advisers who spoke to Treasury officials. Utilities will receive cheap loans taken out by the taxpayer to pass on an equivalent price reduction to their customers.

The rebate is expected to be around £200 per house, costing the Treasury around £6 billion in total. Energy providers will repay the loan in future years by adding a surcharge to bills once prices fall, spreading the cost over many years.

A similar loan program will be used to cover the cost of supporting defaulting rivals’ customers. More than two dozen suppliers have gone bankrupt since gasoline prices began to soar in August. New targeted measures to support the poorest households are also expected.

By targeting bonds, the Treasury will reduce inflation, which will relieve the BOE a little. The price stabilization measure would reduce inflation by about 0.3 percentage points, said Simon French, chief economist at Panmure Gordon. Bloomberg Economics estimated that inflation could be 0.5 points lower.

Energy and inflation are just two of the pressures facing consumers. The Treasury is adding to the pain by raising payroll taxes from April to fund health and care for the elderly.

A loan scheme would also have the advantage of being off the books, giving the Treasury more fiscal firepower to target support to poorer households facing fuel poverty and higher basic living costs. students. An increase in the Warm Home Discount, a reduction in VAT on fuel bills, a reduction in council tax and a higher revaluation of benefits, including the state pension, were all discussed.

A £200-a-year break on bills would cost the government £6billion a year, said Paul Johnson, director of the Institute for Fiscal Studies. This would be “pretty substantial – half the increase in the tax increase on national insurance contributions“.

French said: “The package risks spreading relief to those who can easily afford the hike, leaving less financial support for those who face a difficult choice between eating and staying warm.”

Lower headline inflation would help the BOE ensure that the current spike in inflation does not become permanent. “Rising rates only make people’s misery worse. It’s a complicated balancing act for the Bank,” Buckley said.

The government has already earmarked around £12billion in support for energy bills for this financial year and next. This includes £500million for the most vulnerable through initiatives such as the Household Support Fund and Warm Home Discount.

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