Bank expects energy cap to rise 24 percent in early 2027

Why the letters exist

Source: Bank of England and HM Treasury, 17 September 2026.

Twelve-month CPI inflation was 3.1 percent in August, more than 1 percentage point above the 2 percent target. Under the Monetary Policy Committee remit, that deviation requires the Governor to write to the Chancellor explaining why inflation is above target and what the Bank is doing about it. The exchange of open letters between the Governor, Andrew Bailey, and the Chancellor, John Healey, was published by the Bank of England on 17 September 2026, alongside the MPC decision. The letters were copied to Dame Meg Hillier MP, chair of the Treasury Committee, and deposited in the Libraries of both Houses of Parliament.

In his letter, the Governor set out the composition of the overshoot. Of the 1.1 percentage point deviation from target, 0.7 percentage points was accounted for by direct energy effects, mostly motor fuels. That attribution matters for how the Bank frames the problem: a large part of the above-target inflation is coming through energy prices rather than through domestic wage and price setting. The Governor's letter also noted that services inflation was 3.4 percent in August, down from 4.5 percent in March, and that annual growth in private sector regular Average Weekly Earnings in the three months to July was 2.9 percent, down from 3.3 percent at the start of the year. Those two numbers point to easing domestic pressure even as energy pushes the headline rate up.

The energy forecast in the Governor's letter

Conditional on futures prices at the close of business on 14 September, the Bank expects the Ofgem price cap to increase by 4 percent in Q4 2026 and a further 24 percent in Q1 2027. That is the central forecast in the Governor's letter, and it is conditional rather than a promise: it moves with wholesale prices. The starting point is already elevated. The cap was raised to 1,663 pounds in Q3 from 1,477 pounds in Q2, and domestic gas and electricity prices rose by around 15 percent and 4 percent respectively in July. A 24 percent rise on a cap of roughly 1,730 pounds would add several hundred pounds to a typical annual bill, though the cap is a unit-rate cap rather than a bill cap, so usage decides the total.

The Bank's staff expect CPI inflation to rise to around 3.75 percent in 2026 Q4 and slightly above 4 percent in early 2027. Two further channels are at work. UK-weighted world export prices increased by more than 5 percent between the end of 2025 and 2026 Q2, and global agricultural commodity prices have risen by more than 20 percent since the end of February. Indirect effects of higher energy prices through firms' supply chains are expected to add around 0.6 percentage points to CPI inflation by 2027 Q1. In the August Decision Maker Panel survey, a net balance of 56 percent of firms expected their margins to fall because of the energy price shock, which suggests companies are absorbing part of the cost rather than passing all of it on.

What it looks like at the pump and on the shelf

Average petrol pump prices have risen from around 130 pence per litre in February, prior to the conflict, to around 170 pence. Diesel has risen from around 140 pence per litre to around 190 pence. Those are the most visible prices in the inflation basket and they feed directly into the 0.7 percentage point energy contribution the Governor identified. For a driver filling a 50 litre tank, the petrol move is roughly 20 pounds per fill compared with February, and the diesel move is roughly 25 pounds per fill. The fuel duty cut of 5p has been extended to the end of the year alongside the Fuel Finder service, which the Chancellor lists in his reply.

The pressure is not confined to fuel. UK-weighted world export prices increased by more than 5 percent between the end of 2025 and 2026 Q2, and global agricultural commodity prices have risen by more than 20 percent since the end of February. Those feed into food and goods prices with a lag, and the Bank expects indirect effects through supply chains to add around 0.6 percentage points to CPI by 2027 Q1. The combined picture is a headline rate driven by energy and imports, with domestic services and wage growth cooling. That split is why the letters focus on energy measures rather than on demand management.

What the Chancellor says the government is doing

The Chancellor's reply lists the temporary removal of VAT on household electricity bills from October, which takes around 45 pounds off the yearly Ofgem price cap, on top of 150 pounds removed at the last Budget. It also lists a 2 pound bus fare cap on single tickets in England outside London from 1 January 2027, the scrapping of restrictions on concessionary bus passes for disabled people from April, and the 5p fuel duty cut extended to the end of the year alongside the Fuel Finder service. The Chancellor states his first Budget will be held on Wednesday 28 October.

The timing of those measures matters against the forecast. The VAT removal lands in October, before the expected 4 percent Q4 rise and ahead of the 24 percent Q1 rise. The bus fare cap starts on 1 January 2027, at the start of the quarter in which the Bank expects the largest cap increase. The 45 pounds off the annual cap is a fixed cash amount, so its proportional effect shrinks as the cap rises. The Chancellor's letter does not put a number on the total package beyond the 45 pounds and the 150 pounds already removed, and it does not forecast the cap itself. The Bank's forecast remains conditional on futures prices at close on 14 September.

KT: what a household can actually do before January

A 24 percent rise on a cap of roughly 1,730 pounds would add several hundred pounds to a typical annual bill, though the cap is a unit-rate cap rather than a bill cap, so usage decides the total. The practical steps before the increase are administrative rather than dramatic. Submit a meter reading on the day the new cap starts so the old rate covers prior usage, which prevents estimated usage being charged at the higher rate. Check eligibility for the Warm Home Discount, a 150 pound rebate on electricity bills for eligible households, and the Priority Services Register, a free service from suppliers and network operators. Both are free to check and free to join.

On tariffs, the comparison that matters is against the expected Q1 rise rather than against today's cap, because a fixed deal priced off today's rates may look different once the 24 percent increase is in the baseline. The British Gas Energy Trust's Energy Support Grant opens on 1 October 2026 with grants of up to 1,700 pounds for eligible households in energy debt, available regardless of supplier. That is separate from the Warm Home Discount and from any supplier-specific scheme. The letters themselves do not recommend any of these steps; they set out the forecast and the government measures. The dates to hold in mind are 1 October for the grant opening, 28 October for the Budget, and the start of the new cap period in January.

Source: Bank of England: exchange of letters on CPI inflation, September 2026.

Related coverage on Kael Tripton: Energy Price Cap Rises to £1,723 From October 2026, Energy Price Cap Explained: Current Rates and Next Change, Warm Home Discount: Check Your Bill Before 23 August, Warm Home Discount Explained 2026: £150 Rebate Meaning, Burnham Weighs Cutting VAT on Energy Bills to Save £130 a Year.

Frequently asked questions

How much is the Ofgem price cap expected to rise?

Conditional on futures prices at the close of business on 14 September, the Bank of England expects the Ofgem price cap to increase by 4 percent in Q4 2026 and a further 24 percent in Q1 2027. The forecast is in the Governor's open letter to the Chancellor, published 17 September 2026.

Why did the Governor write to the Chancellor?

Twelve-month CPI inflation was 3.1 percent in August, more than 1 percentage point above the 2 percent target. Under the MPC remit, that requires the Governor to write to the Chancellor explaining why inflation is above target and what the Bank is doing. Of the 1.1 percentage point deviation, 0.7 percentage points was accounted for by direct energy effects, mostly motor fuels.

What is the price cap now?

The Ofgem price cap was raised to 1,663 pounds in Q3 from 1,477 pounds in Q2. Domestic gas and electricity prices rose by around 15 percent and 4 percent respectively in July.

What does a 24 percent rise mean in pounds?

A 24 percent rise on a cap of roughly 1,730 pounds would add several hundred pounds to a typical annual bill. The cap is a unit-rate cap rather than a bill cap, so actual usage decides the total.

What support is available?

The Warm Home Discount is a 150 pound rebate on electricity bills for eligible households. The Priority Services Register is a free service from suppliers and network operators. The British Gas Energy Trust's Energy Support Grant opens on 1 October 2026 with grants of up to 1,700 pounds for eligible households in energy debt, available regardless of supplier.