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Soaring Energy Prices Drive UK Inflation To 10-Year High

High energy prices drove inflation in the UK to a 10-year high of 4.2 percent in October, and energy is expected to fuel additional price hikes next year when the energy regulator is set to raise the so-called price cap.

The UK has a so-called Energy Price Cap in place, which protects households from too high bills by capping the price that providers can pass on to them, but which additionally burdens energy providers.

The Consumer Prices Index (CPI) in the UK rose by 4.2 percent in the 12 months to October 2021, up from 3.1 percent in September, the Office for National Statistics said on Wednesday.  

The October inflation rate was well ahead of the Bank of England target of 2.0 percent inflation, which raises the odds of the central bank raising interest rates in December.

Last month, “the main upward pressure came from electricity, gas and other fuels, which contributed 0.59 percentage points to the CPIH 12-month inflation rate,” the Office for National Statistics said today.

The price rises follow the increase in the cap on energy prices, which changed on October 1, 2021. The Office of Gas and Electricity Markets (Ofgem) updates the energy price caps twice a year, in April and October, to ensure that they reflect changes in the cost of supplying energy. Ofgem last raised the price cap from October 1, 2021, to March 31, 2022, in August. Ofgem said that the price cap had increased by 12 percent since April 2021 because of “a rise of over 50% in energy costs over the last six months with gas prices hitting a record high as the world emerges from lockdown.”  

For the period after April 1, 2022, the price cap is likely to be raised further, considering the rally in gas and electricity prices in recent weeks. Ofgem is set to announce in February the price cap for the six-month period after April 1. Expectations are for another increase.

“There’s no doubt the price cap is going to go up,” Ellen Fraser, a partner at consultancy Baringa Partners, told Bloomberg on Wednesday.

Since the energy crunch began in September, more than a dozen power suppliers in the UK have exited the retail energy market, and more are likely to do so as wholesale gas prices rallied.

By Tsvetana Paraskova for Oilprice.com

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