Energy bills to be hundreds of pounds lower ‘in months’ as inflation set to drop, Bank of England says

Energy bills could soon be hundreds of pounds lower than originally forecast within months, new analysis suggests.

Experts at Cornall Insight have said energy prices are set to drop after a hike in the spring, and this in turn is expected to lower inflation.

The average household’s energy bill might hit around £2,200 a year from July, according to the energy consultancy firm, which is around £300 less than previously thought. It is around the same amount as an average family currently pays after the government support has been factored in.

Without backing from the government, the average household would pay £4,279 per year for their energy bills between January and April – the level of the Ofgem price cap. But the government has overridden the price cap with a promise to pick up the difference and ensure that average bills are £2,500, and has been sending £400 to every UK household between October and March. From April, the support becomes less generous and will only reduce average bills to £3,000.

The new forecasts suggest that Ofgem’s price cap will be set at £3,209 from the start of April, around £300 less than its previous forecast just two weeks ago. This will not reduce the amount that households pay, as it will still be overridden by the less generous government guarantee.

After that, the price cap is forecast to fall again to £2,201 from July and rise slightly to £2,241 from October to the end of the year, Cornwall Insight said. If these forecasts are correct it will mean that the government support for energy bills in practice ends in July as bills will naturally be lower than the cap that ministers have promised to enforce.

However, Dr Craig Lowrey, principal consultant at Cornwall Insight, warned that things could rapidly turn around again if global markets get spooked. He said: “As our price cap forecasts fall yet again, it is only natural that people will begin to assume our predictions will stay on a downward trajectory.

“But we really don’t have a precedent to look at to work out how the market will evolve in 2023, so some perspective must be maintained.

“The cap predictions for April remain nearly three times what a typical household was paying pre-pandemic, and as the Energy Price Guarantee rises, some households could be left with hundreds of pounds added to their April bills.

“We do not know what will happen over the coming months and there is a long way to go before anyone can be certain what the true unit rates will be beyond the summer. So, while declining wholesale markets and cap forecasts may be a reason to feel cheerful, nothing is guaranteed in this new European energy market.”

Inflation likely to fall ‘rapidly’ in late spring

The Governor of the Bank of England has said lower energy prices will help to drive down inflation in the coming months and is expected to fall “quite rapidly” starting in the late spring.

The Office for National Statistics (ONS) said the rate of Consumer Prices Index (CPI) inflation fell to 10.5% in December from 10.7%, offering a further sign that the cost-of-living crisis may have passed its peak.

Andrew Bailey told Business Live during a visit to South Wales that the drop in inflation was “the beginning of a sign that a corner has been turned”. He said: “What we think is the most likely outcome is that (inflation) will fall quite rapidly this year, probably starting in the late spring and that has a lot to do with energy pricing.

“There was a sort of locked in level of energy prices over the winter, but we expect it to fall quite rapidly after that, for at least for a couple of reasons.

“One, it is a bit of arithmetic in the sense as it is of course an annual calculation so the big base effects from last year will start to fall out, and unless something happens it will start to fall quite rapidly actually as we showed in our November monetary policy report.

“The other thing that has happened really in the last couple of months is that particularly energy prices have started to come off and gas prices quite a lot actually since the beginning of the winter.”

“That isn’t actually yet feeding through, because of the way in which particularly domestic prices are calculated, but it will do. And that is encouraging and I think it is a product that Europe has higher stock levels and we had a warmer winter than we might have done.

“It does mean there is more optimism now that we are sort of going to get through the next year with an easier path there (inflation).”

CPI has eased since the eye-watering 41-year high of 11.1% seen in October last year, when soaring energy bills pushed up the cost of living. It is expected to fall throughout this year as the cost-of-living crisis takes its toll on the economy, and the government has also pledged to help halve inflation by the end of 2023.

The British Chambers of Commerce said that while the peak of inflation appears to have passed, rising prices were still “far and away the top issue” affecting businesses. Economists have also said they believe falling levels of inflation will not prevent the Bank of England from raising interest rates again in February, with Pantheon Macroeconomics pencilling in another 50 basis point rise to 4%.