UK Government Energy Subsidies to Reduce Inflation, ONS Says

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(Bloomberg) — The UK government’s energy-subsidy program will reduce inflation, according to the Office for National Statistics.

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The agency said it will take into account the capped price of energy that consumers pay instead of the total price when it calculates its Consumer Prices Index.

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The Energy Price Guarantee, “as a subsidy on products paid by central government to energy suppliers, influences the prices that domestic consumers are charged for a unit of gas or electricity,” the ONS said in a statement Monday. “It is these reduced unit prices that will be used in compiling” the CPIH, CPI and RPI measures of inflation, “which will hence be lower while the schemes are in operation than if the EPG had not been introduced.”

The guarantee caps the unit price of energy, so that a typical household will pay no more than £2,500. Businesses are receiving equivalent support. The Treasury has costed the two programs at more than £60 billion ($69.5 billion).

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Producer-price inflation will also be lower than it would have been, the ONS said.

The decision is part of a classification review by the ONS on how it will treat the statistics and is in step with what economists and the government had expected.

Former Prime Minister Liz Truss introduced the program in September to cushion households from spiraling natural gas and electricity costs, which jumped following Russia’s invasion of Ukraine and the energy shortages that followed. 

The guarantee was meant to last for two years, but was scaled back to six months when Jeremy Hunt became chancellor, in an effort to calm financial markets worried about the scale of borrowing being proposed. From April, it will be replaced with a measure that is more “targeted” at low-income consumers.