Sunak says household support will have ‘minimal impact’ on UK inflation

UK chancellor Rishi Sunak said his latest package of support for UK households will have a “minimal impact” on inflation after the government announced a windfall tax on energy companies to fund lower fuel bills.

“Our estimate and my view is that it will have a minimal impact on inflation,” Sunak told Sky News on Friday. “The reason for that is twofold. One [reason] is because what we’re doing is very targeted at those most in need, and secondly because we’re also raising money to help pay for it.

“Some people might say . . . you should just spend even more, borrow even more — I think that would be irresponsible, because that would risk driving up inflation, interest rates and people’s mortgages,” he said.

On Thursday, Sunak announced a £15bn support package including a £400 discount on energy bills for all households.

The support will be partially funded by a windfall tax, which could generate £5bn from oil and gas companies this year, and £3bn-£4bn more from electricity groups.

The vast majority of economists who commented on Sunak’s plans disagreed with his claim that it would not be inflationary, but they offered a range of views on the degree of additional stimulus and inflation that the support for households would bring.

Steffan Ball, chief UK economist at Goldman Sachs and a former adviser to Philip Hammond as chancellor, said the additional income for households would support spending and ensure “the UK will narrowly avoid a recession”.

But he said the consequence of this would be more inflationary pressure that forced the Bank of England to act more decisively. “Yesterday’s policy support package gives us more confidence in our view that the BoE will need to hike into contractionary territory in order to rein in wage growth and inflationary pressures,” he said on Friday.

Central banks globally are struggling to find a “neutral” level of interest rates that will tame rampant inflation without tipping their economies into recession.

Shadow chancellor Rachel Reeves welcomed Sunak’s support package, but said more could be done.

“The profits being made by [energy] companies have gone up by more than even Labour had anticipated so there’s more money that can be brought in,” Reeves told BBC Radio 4’s Today programme on Friday.

“I welcome the package of measures. It was borrowed from the Labour party, but imitation is the sincerest form of flattery,” she added.