Liz Truss’s energy price freeze could soften UK recession, say economists | Economic growth (GDP)

Liz Truss’s anticipated energy price freeze could stop inflation in Britain from rising further and reduce the severity of the recession forecast to hit the country this winter, economists have said.

As details of the new prime minister’s plan to tackle soaring household bills emerged on Tuesday, some of the UK’s largest pub groups, food chains and retailers were among the biggest risers on the London stock market as investors bet that support for struggling families would bolster household spending across the economy.

The price cap, expected to be announced on Thursday after Truss assembles her cabinet, would freeze energy bills at about £2,500 a year and come with a price tag for the exchequer of up to £90bn.

Economists said imposing a blanket cap on bills could prevent headline consumer price inflation from rising much further, after the latest figures from July showed the rate had risen above 10% for the first time since the early 1980s.

“Cancelling all or most of the planned October and January prices rises … could be a game changer in our view,” said Elizabeth Martins, UK economist at HSBC. “It would mean that, on a mechanical basis, inflation might already have peaked.”

Capital Economics, a research consultancy, called the package an “effective but expensive sticking plaster”, estimating that inflation could now peak close to 11% in October. It said the UK economy would still likely enter recession, but the contraction in GDP would be more like 0.5%, instead of its current forecasts for a 1% downturn.

Without intervention, the Bank of England had forecast peak inflation above 13% and a lengthy recession, while some economists warned the measure for the rising cost of living could hit 22% next year if high energy costs were sustained.

On a day of relief in financial markets as Truss appeared to back down from a campaign promise not to offer “handouts” to struggling families, the pound rose against the US dollar while the FTSE closed up 13 points at 7,300.

Sportwear giant JD Sports closed 3% higher on the FTSE 100, while clothing and homeware retailer Next climbed 2.5%, as investors hoped that Truss’s economic measures could leave consumers with a little more spending money in their pockets, despite the cost of living crisis.

Pub groups and food retailers – including Mitchells & Butlers, Marks & Spencer, Greggs and Domino’s Pizza – pushed the more UK-focused FTSE 250 higher, in anticipation of a government spending package which would lessen the squeeze on households and help businesses to pay their own bills.

In addition to capping consumer bills, businesses could receive an aid package from the government to help with soaring energy bills – according to Bloomberg – which are making it impossible for some factories, pubs, restaurants and shops to remain open.

Shares in Mitchells & Butlers – one of the UK’s largest pub groups and owner of chains including All Bar One, O’Neill’s and Toby Carvery – closed over 7% higher, while pub group JD Wetherspoon also rose by 4.5%.

The bakery chain Greggs and the fast food chain Domino’s Pizza ended the day more than 6% higher, while shares in Marks & Spencer were up nearly 5%.

However, some analysts cautioned that the recovery in retailers’ share prices might only be temporary. “We might be at the stage where investors take the view that shares in retailers have been oversold,” said Russ Mould, the investment director at the stockbroker AJ Bell.

“How long it will last is another matter, as the general cost of living crisis is still punishing for households, whether energy bills go up further or not.”

The share moves came as research from the building society Nationwide found that the average household is £249 a month worse off than this time last year.

The lender found that 83% of 2,000 surveyed said they are worried about the cost of living squeeze on their household finances, while 71% said they felt they had cut back their outgoings as much as possible.