ENERGY bills are set to grow by more than £200 a year as Ofgem increases the price cap with experts warning that the pressure on households is “immediate” with inflation to soar.
Energy regulator Ofgem has today (Wednesday 27 May) announced a 13% increase of the energy price cap for the period covering 1 July to 30 September.
The price cap refers to the default tariff applied when a customer has not signed for a fixed-rate tariff. It sets a maximum rate per unit and standing charge that can be billed to customers for their energy use.
This increase is a result of higher wholesale gas prices, caused by the ongoing conflict in the Middle East. However, prices remain well below the height of the energy crisis in 2022 when the government stepped in to cap bills at £2,500.
Customers will see a smaller price increase of around 5% on their electricity bills compared to gas bills which are rising by 24%. This reflects the increase in the amount of renewable generation on the system and therefore reduced reliance on gas to generate our electricity.
The current price cap for a typical household paying by direct debit for gas and electricity is £1,641. Based on the energy use of a typical domestic household, from July the price cap will rise by £18 a month (£216 a year) for the average household using both electricity and gas if this level was sustained for a year.
Experts warned that inflation, currently at 2.8%, is set to go up due to energy prices rising.
Energy is one of the most inflationary variables there is
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, said inflation is expected to soar.
She added: “Energy is one of the most inflationary variables there is, because it touches everything. When the price of gas goes up, it does not stop at the household bill. It feeds into the cost of making and moving almost every good and service in the economy. So a rise in the cap is not a one off.
“It seeps into wider prices over the following months. The deeper issue is supply. The world has spent years underinvesting in energy production. Until that capital is spent, every time the economy tries to grow, energy prices are ready to climb again. Governments can suppress prices for a while, but usually at the cost of slower growth. For households, energy is non discretionary.
“You cannot opt out of heating or power, so a higher bill means less money for everything else. That drains spending from the rest of the economy. For businesses, especially energy heavy ones, it squeezes margins. They either absorb the cost or pass it on, which loops back into broader inflation.”
Craig Fish, Director at London-based Lodestone Mortgages, said the knock-on for mortgage rates could be painful.
He added: “£18 a month extra on energy bills, on top of everything else that’s risen, and if you’ve got a mortgage review coming up, the knock-on is just as painful. Higher energy prices push inflation up, inflation keeps the Bank of England holding rates, and holding rates means lenders keep mortgage pricing where it is.
“Anyone waiting for cheaper deals needs independent advice now, not in six months. Rumour has it that at the next review it will stay just as elevated. This isn’t just a one quarter problem, this is a 2026 problem.”
An extra £200 a year is going to hit a lot of households hard
Harry Goodliffe, Director at Winchester-based HTG Mortgages, said households will be hit hard by the rises.
He added: “Another price jump that families didn’t need. An extra £200 a year is going to hit a lot of households hard after years of pressure. It’ll also feed back into inflation because businesses nearly always pass rising energy costs onto customers.
“The bigger problem is confidence. People were only just starting to feel a bit more stable, and now there’s another higher bill coming. Unless the government gets serious about energy, this same cycle will keep repeating itself.”
Nouran Moustafa, Practice Principal & IFA at Roxton Wealth, said businesses will feel the pinch.
She added: “This is another reminder that inflation is not just a number on a chart, it is lived through household bills. A 13% rise in the price cap will put renewed pressure on inflation, particularly because energy feeds into almost everything: transport, food production, business costs and consumer confidence.
“For households, the impact is immediate. Many people have already used up their financial buffer after years of higher mortgage payments, rent, food and insurance costs. Another £18 a month may sound manageable on paper, but for families already budgeting to the pound, it matters.
“Businesses will also feel it, especially small firms with tight margins. Higher energy costs can either reduce profitability or be passed on through prices, which risks keeping inflation stickier for longer. The wider consequence is behavioural. People delay spending, reduce saving, avoid moving home and become more cautious. That caution then filters into the wider economy.”
A serious hit for households
Rohit Kohli, Director at Romsey-based The Mortgage Stop, said the cost-of-living crisis could “rear its head again”.
He added: “A 13% rise in the energy price cap is a serious hit for households, especially with gas bills rising much faster than electricity. For many families, that extra £18 a month will come on top of higher food, rent, mortgage and council tax costs. The bigger issue is that energy sits underneath almost everything.
“Food producers, manufacturers, shops, pubs, restaurants, care homes and small businesses all rely on it. When their costs rise, prices usually follow. That is why the recent fall in inflation to 2.8% was always going to be treated with caution as it may prove to be a brief pause rather than a turning point.
“If energy costs start feeding back through the economy, inflation could become sticky again, making interest rate cuts harder to justify and forcing the Bank of England to raise again. The real concern is that this pushes us towards another winter where the cost-of-living crisis rears its head again, just as households thought the worst might finally be behind them.”
Justin Moy, Managing Director at Chelmsford-based EHF Mortgages, said it was not as bad as expected.
He added: “Any increase in utility costs is unwelcome, but £18 a month is not as bad as perhaps many expected, and with this hike over the summer months, the reduced household gas consumption will offset this extra burden.
“While this increase will factor into mortgage lenders affordability calculations, it’s a negligible amount and not enough to make any sizeable change.”
Photo by Ashes Sitoula on Unsplash.
