The possible policy of the new Prime Minister, Liz Truss, to freeze the utility price cap at £2,500 until sometime in 2024 will dramatically lower the near term path for CPI inflation. Rather than rise from 10.1% in July to around 14.5% in January, it may mean that inflation peaks around 11.5% in November and falls faster next year. The smaller drag on real incomes means that the recession may be shallower too, perhaps with a peak to trough fall in GDP of around 0.5% rather than 1.0%. The cost to the Treasury of paying a chunk of the utility bills of households and firms may be £100bn (4% of GDP) or more. And by supporting demand, the policy will boost inflation further ahead. As such, the risks to our forecast that interest rates will rise from 1.75% now to 3.00% are increasingly on the upside.
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