UK Energy Costs Set to Fuel Inflation Concerns

UK energy costs are poised to become a major inflation headache for Britain's households. The country's energy regulator confirmed that household bills will rise by 3.6% quarter-on-quarter in October, more than double the previously forecasted 0.5% increase. This means that despite Barclays' forecast of headline CPI peaking at 3.1% year-on-year in October, energy costs are a growing concern for policymakers.

Barclays has modeled two scenarios to account for uncertainty over Middle East conflict-driven natural gas prices. In an adverse scenario where gas prices remain high through 2027, the bank's forecast for headline CPI would only rise by 0.1 percentage point to 3.2%. However, in a more favorable scenario where prices fall to around 90p/therm by mid-2027, the forecast would decrease to 3.0%.

Bank of England Governor Andrew Bailey has acknowledged that current evidence on second-round effects remains subdued, but Barclays notes that persistently elevated inflation expectations could lower the bar for future rate hikes.