UK energy bills discount will not lower inflation, says ONS

·Business Reporter, Yahoo Finance UK
·2-min read
A smart meter next to energy bills
Energy bills: The news from the statistics agency will come as a blow to the government, as well as British homes and businesses amid a sharp cost of living squeeze. Photo: Press Association

The Office for National Statistics (ONS) has said that the £400 ($465) “discount” on energy bills offered to UK households this winter will not count towards inflation figures.

It instead will be treated as a current transfer from the central government to the households sector, and not as a price cut.

The news from the statistics agency will come as a blow to the government, as well as British homes and businesses amid a sharp cost of living squeeze.

The ruling will now hike the cost of services linked to inflation, such as mobile phone and broadband contracts. On the other hand, inflation-linked benefits would also rise by more.

Economists and bond investors had been looking closely as to whether statisticians would classify the support packages, which are due to be paid in instalments over six months starting in October, as price cuts for consumers, to directly lower headline inflation rates.

It was also believed that debt interest costs for the government (from inflation-linked bonds) could also be lowered.

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However, the ONS ruled that the Energy Bills Support Scheme (EBSS) should be treated as increasing household income rather than reducing their expenditure.

"Therefore, in line with the ONS's previous decision on the classification of the Council Tax rebate, the payment will not affect either the Consumer Prices Index including owner occupiers' housing costs (CPIH), the Consumer Prices Index (CPI) or the Retail Prices Index (RPI)," it said in a statement on Wednesday.

If the ONS had decided that the measures counted as a reduction in the price of energy as opposed to a discount, the headline rate of inflation would only rise to 11.2% in October, instead of 13.3pc, according to Pantheon Macroeconomics.

Meanwhile, Deutsche Bank said RPI would have been 2.7 percentage points lower in October.

Watch: How does inflation affect interest rates?

It will also have implications for the Bank of England in the coming months, potentially forcing it into stricter action in order to reduce inflation and bring it back in line to its 2% target.

The UK government is also planning equivalent support for Northern Ireland energy customers, but these details are not yet available.

It comes as the two candidates to become Britain's next prime minister have clashed over how to respond to soaring energy prices.

Foreign secretary Liz Truss has said she would rather cut taxes than give handouts to UK households, while former chancellor Rishi Sunak has offered to cut VAT on energy bills and a series of reductions in the basic rate of income tax.

Watch: Labour says Govt missing in action amid cost-of-living crisis