Good morning from Paul & Roland!

Govt energy measures

Press reports are saying that a huge series of support measures are in the pipeline from the Govt, to cap household energy bills at around the current level. Plus big support for business. All at a massive cost of somewhere between £100-170bn. People will have different views, but mine is strongly supportive (although we don't know the details yet). 

The biggest driver of high, and rapidly rising inflation, is energy costs (per the Bank of England analysis I copied here recently). Therefore putting a hard cap on these energy costs is the most effective way to stop inflation in its tracks. 

The knock-on effects of another winter of discontent, with the usual culprits going on strike demanding (say) 15-20% pay rises, should instead now be easier to deal with at a lower level, since inflation might even begin to fall in a few months' time, possibly. Instead pay rise deals might now be struck in a more palatable range of say 5-10%, and be one-offs, rather than getting into a hyperinflationary spiral, which would have happened if energy bills had been allowed to soar to say £6k per household. So it looks as if household concerns should greatly reduce, which should help restore some level of consumer confidence. 

The next big question, is what happens for business? Clearly it's going to bankrupt many small businesses, if there is no relief for the huge increases in energy bills we're hearing about. Presumably something similar is in the pipeline, because I can't see that Govt would throw everything at households, but do nothing for businesses. They tend to favour small business though, so I hope the expected assistance will also filter up to our small caps sector of the market. We wait with baited breath, but so far anyway, the news seems exactly what I was hoping for - big, bold action, to stamp on inflation, and support households from what would have been, for many, completely impossible energy cost increases.

How will financial markets react to this huge increase in borrowing, which looks set to soar back to 10% of GDP p.a., or even above? (typically the peak level of annual spending deficits in recessions). Who knows? In any case, gilt yields can be tuned to anything the Govt wants, using QE - as we've seen since QE started…

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