Liz Truss’s expected energy price freeze could stop inflation in Britain from rising further and reduce the severity of the recession that is forecast to hit the country this winter, economists have said.
As details of the new prime minister’s plan to tackle soaring household bills emerged on Tuesday, some of the UK’s largest pub groups, food chains and retailers were among the biggest risers on the London stock market as investors bet that support for struggling families would bolster household spending across the economy.
The price cap, expected to be announced on Thursday after Truss assembles her cabinet, would freeze an average energy bill at about £2,500 a year and come with a price tag for the exchequer of up to £90bn.
Economists said imposing a blanket cap on bills could prevent headline consumer price inflation from rising much further, after the latest figures from July showed the rate had risen above 10% for the first time since the early 1980s.
“Cancelling all or most of the planned October and January prices rises … could be a gamechanger in our view,” said Elizabeth Martins, UK economist at HSBC. “It would mean that, on a mechanical basis, inflation might already have peaked.”
The research consultancy Capital Economics called the package an “effective but expensive sticking plaster”, estimating that inflation could now peak close to 11% in October. It said the UK economy would still probably enter recession, but the contraction in GDP would be more like 0.5%, instead of its current forecasts for a 1% downturn.
The Bank of England forecast last month that without intervention, inflation would peak above 13% and there would be a lengthy recession, while some economists warned that inflation could hit 22% next year if high energy costs were sustained.
On a day of relief in financial markets as Truss appeared to back down from a campaign promise not to offer “handouts” to struggling families, the pound rose against the US dollar, while the FTSE closed 13 points up, at 7,300.
The sportswear company JD Sports closed 3% higher on the FTSE 100, while the clothing and homeware retailer Next climbed 2.5%, as investors hoped that Truss’s economic measures would leave consumers with a little more spending money in their pockets amid the cost of living crisis.
Pub groups and food retailers – including Mitchells & Butlers, Marks & Spencer, Greggs and Domino’s Pizza – pushed the more UK-focused FTSE 250 higher, in anticipation of a government spending package that would lessen the squeeze on households and help businesses to pay their own bills.
In addition to capping consumer bills, businesses could receive an aid package from the government to help with soaring energy bills – according to Bloomberg – which are making it impossible for some factories, pubs, restaurants and shops to remain open.
Shares in Mitchells & Butlers – one of the UK’s largest pub groups and owner of chains including All Bar One, O’Neill’s and Toby Carvery – closed more than 7% higher, while the pub group JD Wetherspoon rose by 4.5%.
The bakery chain Greggs and the fast food chain Domino’s Pizza ended the day more than 6% higher, while shares in Marks & Spencer were up nearly 5%.
However, some analysts cautioned that the recovery in retailers’ share prices might only be temporary. “We might be at the stage where investors take the view that shares in retailers have been oversold,” said Russ Mould, the investment director at the stockbroker AJ Bell.
“How long it will last is another matter, as the general cost of living crisis is still punishing for households, whether energy bills go up further or not.”
The share moves came as research from the building society Nationwide found that the average household is £249 a month worse off compared with this time last year.
The lender found that 83% of 2,000 surveyed said they were worried about the squeeze on their finances, with 71% saying they felt they had cut back their outgoings as much as possible.
