In my last three columns I’ve written twice on the cost of living and once on industrial action. It is no surprise to me that both these issues continue to hog the headlines, and of course they are directly linked, as striking unions seek pay settlements to offset the steep rises in inflation that we are currently witnessing. There may be some indications that oil prices are falling - which I hope behoves better news for the motorists and those using kerosene for home heating – but it is impossible to escape the grim data swirling in the media. Naturally, this situation has led to many questions from my constituents via email.
One common question is important – why put up interest rates when most price pressure is global? This is a very fair point. The ultimate economic argument is that inflation may well be global in nature, but without higher interest rates there is a risk that it becomes embedded here – a bit like a disease caught abroad that then spreads to become endemic locally. To offset that risk, the theory is that higher interest rates restrict spending power and thereby economic demand (in turn pushing down prices); but I believe the most important effect is reducing our own expectations of future inflation. This is crucial if businesses and individuals are to plan ahead.
Others have asked why the price of heating oil is not regulated, as with other utilities. Most heating oil providers are small firms, rather than multinational companies, and it’s hard to see how they would stay in business if a regulator capped what they could charge below the cost of the wholesale price. However, heating oil is subject to competition rules, and consumer protection regulations under the Competition and Markets Authority. If there isn’t a regulated cap when prices are rising, the important thing is to have a competitive market so that we can all shop around. The last enquiry by the CMA concluded that the market was competitive – but we should very much keep that under review.
Another question – why are ‘renewable only’ tariffs still going up? The best explanation that I’ve seen is from Ofgem, the regulator, comparing our household electricity supply to a ‘smoothie’; that is, a mix of lots of different energy sources (oil, gas, coal, nuclear, renewables etc). So, in most cases, you cannot have your electricity solely from green energy, even if a tariff can ‘solely’ fund green energy by ensuring that those such customers’ revenues are used to purchase the equivalent. But ultimately, we cannot determine the source of energy coming into our homes from the national grid, and the cost of gas sets the marginal price of electricity, so we all pay more regardless of our tariff. I personally think this is somewhat unsatisfactory and we at least need the regulator to look at whether this point is clear to customers.
Perhaps the most important question – what is the Government going to do about the problem? That inevitably strays into the leadership election. Yes, there is pressure for immediate action but it’s worth stressing that help worth hundreds of pounds has already been provided to the most vulnerable households, with all energy users receiving further help from October. Beyond this, I do think it would be hard to expect a ‘caretaker’ Prime Minister to commit the funds which should be spent by his successor with some kind of emergency Budget early in September. Conventionally, caretakers do not create significant new spending commitments and the timing of the agreed support suggests to me that waiting for the new PM to act – but act early – is reasonable.
As to the nature of that support, any exact details will naturally depend on the full picture of the energy cap as it is confirmed by the regulator shortly. In my May column I wrote: “cutting taxes and raising spending is - all other things being equal - likely to add to inflation, not reduce price pressures. Hence, my view is to stress that we should look at what further targeted measures we could provide - particularly for the most vulnerable and those on low incomes - whilst maintaining control of the public finances and keeping a firm hand on the tiller”.
I said the same thing last month and yes, this line is very similar to one of the leadership candidates, but it is my own private view and has been for months. The Government needs to grip inflation and use what spare borrowing it does deploy, not to cut taxes for large companies like BP enjoying bumper profits, but to help struggling households with these very sharp energy price rises.
Published in the Suffolk Free Press.