J.P. Morgan's latest assessment finds that a recent jump in energy prices will complicate the Bank of England's efforts to bring policy rates down. The bank highlights two main drivers - a rise in oil to $78 per barrel from an earlier assumed $65, and a notable increase in near-term natural gas prices - and lays out how those movements could transmit to consumer inflation and growth.
Oil and transport fuel effects
The bank notes that oil climbing to $78 per barrel from the $65 assumption used in earlier projections would, if maintained, add about 0.2 percentage points to the consumer price index this year. That impact would primarily hit liquid fuels used in transport and is expected to appear in the CPI within one to two months.
Gas, the Ofgem cap and household energy bills
On the gas side, one-year-ahead pricing has moved up by roughly 22%, from approximately 77 pence to 95 pence per therm. J.P. Morgan calculates that this rise could be enough to add roughly 0.3 percentage points to the CPI when the higher wholesale costs feed into consumer energy bills. The bank points out that the next opportunity for the Ofgem price cap to reflect these market moves is in June; the April cap had already been set and will not capture this recent change.
Baseline forecast versus an energy-shock scenario
Under its baseline, J.P. Morgan still expects the annual CPI rate to drop from 3.1% in March to 2.2% in April, a decline driven largely by fiscal and regulated price changes, including lower energy bills. However, the bank warns that if current market levels persist, the energy shock could raise the annual CPI by about 0.6 percentage points by July. In that scenario, inflation would be running near 2.7% year-over-year instead of the 2.1% projected for the third quarter.
The note also highlights that second-round effects - where initial price increases feed through into broader wage and price-setting dynamics - should be considered. J.P. Morgan refers to the Bank of England's prior caution that second-round effects may be stronger during periods of higher inflation.
Growth consequences and household responses
While characterizing the current episode as a supply-side disruption, the bank expects the described inflation shock to weigh on growth. Their estimate places the potential drag at around 0.2% to 0.3% of GDP, although the ultimate impact will depend on the extent to which households smooth consumption in response to higher energy costs.
Implications for Bank of England policy
J.P. Morgan says the BoE must balance a possibly higher inflation path against a weaker growth and labour-market outlook. That trade-off could still support further rate reductions, but the prospect of larger second-round effects and the uncertainty surrounding the shock may make the central bank more cautious.
The bank retains the timing of its March forecast for the next BoE cut but acknowledges that the chances of a later move have increased. It adds that if market pricing remains elevated, the Bank of England may prefer to wait for key April CPI and wage data before lowering rates, which would effectively postpone action until June.
Summary
J.P. Morgan's analysis shows that higher oil and gas prices could lift U.K. inflation modestly while trimming growth, creating a dilemma for the Bank of England. The bank's baseline still anticipates disinflation in April, but a sustained energy-price shock could push inflation higher through the summer and prompt the BoE to delay rate cuts until it sees April data.
Key points
- Oil rising to $78 per barrel from a $65 assumption could add about 0.2 percentage points to CPI within one to two months - impacting transport fuel prices.
- Natural gas one-year pricing up from ~77p to 95p per therm (about a 22% increase) could add ~0.3 percentage points to CPI when the June Ofgem cap update passes higher wholesale costs to consumers; the April cap is already fixed.
- J.P. Morgan's baseline sees CPI fall from 3.1% in March to 2.2% in April, but a sustained energy shock could raise the annual rate to around 2.7% by July versus a forecasted 2.1% in Q3.
Risks and uncertainties
- Persistence of elevated energy prices - if oil and gas prices remain at current levels, inflation could be higher and more persistent, affecting consumer-facing sectors such as transport and household energy.
- Second-round effects - there is uncertainty about the extent to which initial energy-driven price rises may feed into broader wage and price-setting dynamics, which could complicate monetary policy decisions.
- Household smoothing behaviour - the magnitude of the growth impact (estimated at 0.2% to 0.3%) depends on how much households smooth consumption in response to higher bills, introducing uncertainty for retail and consumer sectors.