Impact of Truss; "Energy Price Guarantee"

The new PM's signature policy could cost over 7% of GDP, so it's natural to wonder what the
inflation implications are and where that money will end up.

Is all spending inflationary?

While the Government touts how much the program will help consumers, wading through the political speak of the official releases leaves a very important question: How will this be paid for? Depending on the mechanism, that could have varying levels of inflation implications. The full details have yet to be released by the Chancellor, but there are some things that we already know.

There are two components: a 2-year price freeze for consumers and a 6-month price freeze for businesses. On the one hand, this means that consumers and businesses will have more money to keep buying, which might be seen as pro-inflationary. On the other hand, by freezing prices to businesses, it stops the higher costs of energy from being passed on to other sectors. UK shoppers are already moving to spend less, meaning having more disposable income might not necessarily translate into increased demand.

Show the money

But that leaves out the major uncertainty of the source for funding. Previous plans for capping prices addressed this issue by potentially setting up a private fund to loan money to struggling energy companies, potentially with the government acting as a backstop. The scheme envisioned a 2-year price freeze, and consumers would pay back the loans through higher prices over the years, plus interest.

Recently it emerged that the BOE would loan up to £40B to energy companies to keep them afloat. Centrica (the owner of British Gas) has voluntarily committed to cap profits, hinting that the new energy rescue plan might include requirements on firms, just like covid rescue packages did. Restrictions included limitations on paying dividends and buying back shares.

Regardless, the plans seem to be around the idea of putting the private sector forward as the source of funding, instead of the government. Then the debt could be "sterilized" over time plus interest, potentially reducing the inflation impact.

Incoming triangle breakout?

FSTE rose to 7500 after stocks like BP and Lloyds jumped higher on the relief. The index found resistance there and flipped back below the 200/50 SMA cross, which is brewing up an upward breach near 7400. 7150 is the next support, and 7580 resistance. Breaking the bottom opens to door to the 7000 handle with major support at 6760, whereas moving past the top would confirm the triangle and expose 7690 and the measured move high of ~8500. Judging by the current momentum, the chart looks more bid than ask.

Key takeaways

Truss’ “energy price guarantee” has left concerns about inflation and how the program will be paid. A price freeze to stop the higher costs of energy from being passed on to other sectors is due, despite providing an incentive to buy more. Britain's government is going to loan energy companies £40B to keep them afloat but they may limit dividends and share buybacks. The plan for capping prices is unclear as to how the funding will be obtained, though a private fund with a government backstop is likely to keep inflation from rising.