For as long as the scheme’s in place this will temper any further rise in headline inflation, and with it any related increase in “second-round” effects over the medium term. However, by relieving some of the immediate pressure on household finances, the policy would also add significantly to domestic spending over the next year (relative to our last forecast). At the margin, the task of reducing overall demand growth, in order to bring inflation back to target, would therefore tilt more towards monetary policy. And as I argued earlier, there’s less reason to respond to this news in a “gradual” or “smoothed” manner. Whether or not that response needs to be as large as the shift in market interest rates, since our last set of forecasts, remains to be seen. For one thing, there is now some uncertainty about the prospective scale and nature of the government’s energy subsidies. On Monday the Chancellor said the Energy Price Guarantee would be maintained only for six months, rather than the two-year period originally planned. He suggested support was likely to continue, beyond six months, albeit in a more targeted fashion. But we are unlikely to know for a while precisely the form that will take. Second, the rise in market interest rates has been very dramatic. At the time of the Monetary Policy Report in August, prices in financial markets were consistent with Bank Rate rising to a peak of 3% next spring and then falling back a little over the following year.
The UK is a big net importer of (non-energy) goods. And although the North Sea is still providing quite a bit of oil and gas, here too the UK runs a significant deficit. Besides, only a very small minority of UK residents actually receive any disposable income from that source. Notionally “British” companies operating in the North Sea have significant foreign ownership. What domestic shareholdings do exist are likely to be held mostly in pension funds and other long-term (i.e. inaccessible) investment vehicles. This means that, for given GDP, rises in the relative prices of goods and energy make us collectively worse off. And that’s exactly what’s happened over the past couple of years, thanks first to the pandemic and then Russia’s cut in gas exports. Over that period the price of the UK’s imports has risen by 20% more than the average price of its output. You can see this in the last bar in Chart 2. Chart 2: Bucking the long-term trend, import prices have risen much faster than output prices over the past couple of years  12 10 8 6 4 2 0 -2 -4  Change in import prices relative to GDP deflator, annual average, % points 12 10 8 6 4 2 0 -2 -4 60s 70s 80s 90s 00s 10s Last two years  Source: ONS and Bank calculations.