–British Gas Unveiled Friday 7% Hike in Gas And Electricity
–BOE November Inflation Report Was Conditioned Only On Gas Hikes

LONDON (MNI) – Retail gas and electricity are on the way up in the
UK but in its November Inflation Report the Bank of England only
factored in gas price rises, implying it may have underestimated the
impact of the utility price rises on inflation.

On Friday British Gas announced it was hiking electricity and gas
prices by 7% from December 10, following Scottish and Southern’s 9.4%
gas price rise, with the latter coming into effect at the start of the
December.

British Gas is the largest gas supplier, with market share
estimated at something over 40%, and has some 20% of the electricity
market.

In the BOE’s November Inflation Report, it said the Monetary Policy
Committee’s inflation projections were “conditioned on the assumption
that domestic gas prices rise by around 10% in coming months – that
would boost CPI inflation by around 0.2 percentage points.”

The Inflation Report contains no reference to increases in
electricity prices.

The fact British Gas has moved gas prices up by less than the 10%
than the BOE was forecasting will soften the impact of the central bank
failing to factor in the electricity price rise.

On the face of it, the omission appears strange as gas and
electricity price moves tend to correlate well. There are, however, a
few reasons why the November Inflation Report may not have factored in a
rise in gas prices.

The first is the increase in wholesale gas prices has been more
pronounced than the rise in wholesale electricity prices; the second is
earlier this year cuts in gas prices were not matched by cuts in
electricity prices and the third is a recent report by utilities
watchdog Ofgem showed margin pressures are more intense on gas than
electricity.

On Market News calculations the British Gas and Scottish and
Southern hikes so far announced will add more than 0.1 percentage points
to the yearly rate of change to December CPI.

Philip Rush, economist at Nomura, puts the combined impact of the
utility hikes so far announced at 15 basis points to the annual
inflation rate.

In a research note, he says that with the UK gas market dominated
by a few large players, there is a tendency to “herding” on pricing –
with price changes tending to be large and infrequent.

Rush expects further electricity and gas price hikes to come
through after the December inflation data collection point, which means
they will impact January CPI. Rush forecasts they will add another 15bps
to that month’s headline inflation.

There is one major energy supplier, however, which has bucked the
trend, at least for now.

EDF Energy has pledged to keep standard gas and electricity prices
for residential customers at their current levels this winter, until at
least the start of March 2011.

–London newsroom: 0044 20 7862 7491; email:
drobinson@marketnews.com, wwilkes@marketnews.com

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