GETTING TO ZERO
While inflation has dropped back to target levels, more inflationary shocks are coming, spurred by climate change, global conflict and protectionism. We cannot tackle inflationary shocks solely through contractionary monetary policy and expensive fiscal support. We need to be better insulated against volatile prices, not just respond to them after they have risen."
Inflation is now back at the Bank of England’s 2% target, but the British economy remains perilously exposed to future price shocks. The twin drivers behind the inflation crisis remain unsolved: gas dependency and food insecurity. These vulnerabilities are why the UK experienced the highest inflation of any G7 nation over the last three years – and answering these weaknesses must remain a priority for any government seeking to grow the economy, reduce public debt, and tackle the cost of living.
The UK is Europe’s fourth most gas-dependent nation. Gas provides 40% of our energy needs and generates a third of Britain’s electricity, compared to Germany’s 16% and France’s 9%. More than eight in ten British homes rely on gas boilers to stay warm. And farmers depend on it for fertiliser and heating greenhouses. That’s why the gas crisis hit the UK so hard, driving up energy bills and food prices and wiping out farm profits.
Food insecurity has also driven inflation. The UK relies heavily on certain food imports, with 84% of fresh fruit and 45% of fresh vegetables on supermarket shelves grown overseas. Extreme weather, made more frequent and intense with climate change, is already hitting food production. New trade barriers with the EU have further complicated the situation.
High inflation has caused significant damage to the economy, families and the nation’s finances. The average household has spent an additional £3,000 on energy and food since 2021. Inflation sparked a short-lived recession followed by anaemic growth. Public debt has risen beyond 99% of GDP. The contractionary monetary policy medicine may have worked to bring inflation down, but it has also inflicted harm, with mortgage payers seeing higher bills. And the underlying drivers of inflation remain.
International peers are going further and faster to secure their economies. The UK doesn’t have the fiscal firepower to match the US Inflation Reduction Act, which is estimated to cost around $1 trillion over ten years. However, the UK should design a targeted package of supply-side measures to address its vulnerabilities. Onward’s new research paper, Target Practice, includes a five-point Inflation Stability Strategy laying out how the new Government can achieve this.
1. Expand “home grown” renewable energy to reduce exposure to volatile fossil fuels by combining targeted support, planning reform and mobilisation of public financial institutions.
1.1 Ensure the approach to CfDs, including budgets and other parameters, provides long term certainty for large scale renewables deployment and continues to effectively hedge against price shocks.
1.2 Accelerate renewables generation and electricity network planning processes by swiftly publishing strategic plans and reflecting them in National Policy Statements, and mandating community benefits.
1.3 Update risk-based capital requirements and loan loss provisions to account for climate-related financial risks and lower the cost of borrowing for renewables projects.
1.4 Mobilise UK public financial institutions and GB Energy to support the scale up of new clean energy technologies.
1.5 Commit to the introduction of zonal wholesale electricity pricing to lower household bills without deterring renewable energy investment.
2. Use energy more efficiently and reduce demand for gas and oil through better design of incentives, levies and taxes.
2.1 Introduce a new home energy efficiency loan scheme that enables households to make payments as they save and provides access to low cost financing.
2.2 Shift legacy green levies from electricity bills onto general taxation to mitigate inflationary spikes, and incentivise heat pump and EV adoption.
2.3 Introduce incentives for farmers to use less synthetic fertiliser, install heat pumps in greenhouses, and encourage poultry farms to convert manure into organic fertiliser, reducing the industry’s dependency on gas.
2.4 Support the adoption of EVs by improving access to and lowering the costs of charging.
3. Improve supply chain resilience to mitigate exposure to price shocks by forming stronger agreements with allies and strengthening domestic production capabilities.
3.1 Agree a new AUKUS pillar to develop critical minerals, metals, and rare earths supply agreements.
3.2 Enable transmission network developers to secure their supply chains by facilitating procurement coordination and allowing longer supplier frameworks.
3.3 Support the expansion of controlled environment farming to increase domestic production of fresh vegetables under threat from climate change.
3.4 Negotiate a veterinary agreement with the EU to reduce non-tariff barriers to food imports.
4. Develop the skilled workforce required to deliver a renewables led, electrified economy by enabling easier transitions between energy sectors and addressing skills gaps in inflation-proofing industries.
4.1 Introduce a skills passport for the energy industry so workers can more easily transition between similar sectors.
4.2 Develop training grants to address critical skills gaps in inflation-proofing industries and establish new academies to build the future workforce.
5. Better embed price stability as a strategic priority in Treasury policy assessments and management of the public finances.
5.1 Extend the OBR’s forecast horizon to at least ten years to effectively assess the impact of fiscal decisions on the long term exposure to inflationary drivers.
5.2 Review the use of index-linked gilts given their contribution to major spikes in government debt payments.
1. Expand “home grown” renewable energy to reduce exposure to volatile fossil fuels by combining targeted support, planning reform and mobilisation of public financial institutions.
1.1 Ensure the approach to CfDs, including budgets and other parameters, provides long term certainty for large scale renewables deployment and continues to effectively hedge against price shocks.
1.2 Accelerate renewables generation and electricity network planning processes by swiftly publishing strategic plans and reflecting them in National Policy Statements, and mandating community benefits.
1.3 Update risk-based capital requirements and loan loss provisions to account for climate-related financial risks and lower the cost of borrowing for renewables projects.
1.4 Mobilise UK public financial institutions and GB Energy to support the scale up of new clean energy technologies.
1.5 Commit to the introduction of zonal wholesale electricity pricing to lower household bills without deterring renewable energy investment.
2. Use energy more efficiently and reduce demand for gas and oil through better design of incentives, levies and taxes.
2.1 Introduce a new home energy efficiency loan scheme that enables households to make payments as they save and provides access to low cost financing.
2.2 Shift legacy green levies from electricity bills onto general taxation to mitigate inflationary spikes, and incentivise heat pump and EV adoption.
2.3 Introduce incentives for farmers to use less synthetic fertiliser, install heat pumps in greenhouses, and encourage poultry farms to convert manure into organic fertiliser, reducing the industry’s dependency on gas.
2.4 Support the adoption of EVs by improving access to and lowering the costs of charging.
3. Improve supply chain resilience to mitigate exposure to price shocks by forming stronger agreements with allies and strengthening domestic production capabilities.
3.1 Agree a new AUKUS pillar to develop critical minerals, metals, and rare earths supply agreements.
3.2 Enable transmission network developers to secure their supply chains by facilitating procurement coordination and allowing longer supplier frameworks.
3.3 Support the expansion of controlled environment farming to increase domestic production of fresh vegetables under threat from climate change.
3.4 Negotiate a veterinary agreement with the EU to reduce non-tariff barriers to food imports.
4. Develop the skilled workforce required to deliver a renewables led, electrified economy by enabling easier transitions between energy sectors and addressing skills gaps in inflation-proofing industries.
4.1 Introduce a skills passport for the energy industry so workers can more easily transition between similar sectors.
4.2 Develop training grants to address critical skills gaps in inflation-proofing industries and establish new academies to build the future workforce.
5. Better embed price stability as a strategic priority in Treasury policy assessments and management of the public finances.
5.1 Extend the OBR’s forecast horizon to at least ten years to effectively assess the impact of fiscal decisions on the long term exposure to inflationary drivers.
5.2 Review the use of index-linked gilts given their contribution to major spikes in government debt payments.
Ben Caldecott, Chairman of Onward’s Inflation Prevention Project, said: “The UK is highly vulnerable to drivers of inflation, casting a shadow of uncertainty over businesses, households, and the public finances, placing us at a distinct disadvantage to our peers.
“While inflation has dropped back to target levels, more inflationary shocks are coming, spurred by climate change, global conflict and protectionism. We cannot tackle inflationary shocks solely through contractionary monetary policy and expensive fiscal support. We need to be better insulated against volatile prices, not just respond to them after they have risen.
“The new Government should set out a comprehensive plan to reduce the UK’s exposure to inflationary drivers and enhance our resilience to inflationary shocks.”
Ned Hammond, Head of Energy & Environment at Onward, said: “Inflation may be back on target, but it’s not ‘job done’ as Britain remains perilously exposed to price shocks.
“In an increasingly volatile world with the impact of climate change biting, there will be future inflation crises. We cannot afford to be hit as hard again by rising energy and food bills, which cost families and the nation dearly.
“These are targeted steps ministers can take to secure the UK’s economy. The new government may have inherited low inflation, but preventing future shocks must be a top political priority to meet their promises on growth and the cost of living.”
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