Energy shock risks complicating BoE cuts – Deutsche Bank

Deutsche Bank’s Sanjay Raja and Shreyas Gopal warn that renewed energy price shocks are clouding the UK inflation outlook. They note that Oil and gas prices have surged, and that around half of the UK CPI basket is now highly energy‑intensive, especially services. This raises risks of more persistent inflation and could challenge Bank of England rate‑cut plans.

Energy intensity raises UK inflation risks

“Geopolitical tensions now dominate markets, with the war in the Middle East adding a thick layer of uncertainty for the UK’s inflation outlook. Indeed, oil prices are up nearly 15% this week. And spot gas prices are up 70%. “

“On our trackers, if this persists, the once forgone conclusion that the UK would see the largest disinflation among any G7 economy could come to an abrupt halt. Pump prices are set to rise in the coming months. And households could see a big shock in dual fuel bills come July.”

“For the Bank of England, with the 2022 energy shock still likely salient, fears of inflation persistence will likely increase should energy prices remain (or rally further) from current levels. Indeed, if held, such moves would disrupt the UK’s disinflation track meaningfully and raise concerns of second-round effects next year, including sticky inflation expectations. This could buoy wage settlements in the coming year, putting in doubt both the pace and scale of rate cuts.”

“Put simply, half of the CPI basket is highly sensitive to energy prices. Outside of fuels, oil and gas, these include items such as foods and services. Interestingly, services items have a higher intensity rating on average relative to core goods, with travel fares, restaurants, and accommodation all highly sensitive to energy prices.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)