Overview
Britain’s energy regulator has confirmed that the household energy price cap will increase by 3.6% quarter-on-quarter in October. That rise is more than double the 0.5% quarter-on-quarter increase Barclays had been expecting, though the bank said the larger cap reset does not change its broader inflation trajectory.
Barclays’ inflation and price-cap outlook
Barclays reiterated that the Q4 price cap uplift does not alter its forecast for headline consumer price inflation (CPI), which the bank still expects to peak at 3.1% year-on-year in October. The bank maintained its annual average CPI projections for 2026 and 2027 at 3.0% and 2.5%, respectively.
Within the price-cap components, Barclays noted a divergence between electricity and gas. The electricity cap is projected to fall by 0.4% quarter-on-quarter as higher wholesale prices are offset by the removal of VAT on electricity bills. By contrast, the gas cap - where VAT is retained - is set to rise 7.9% quarter-on-quarter.
Looking toward Q1 2027
Barclays has begun its conditioning period for the Q1 2027 price cap. Using market pricing as of August 26, the bank’s model implies a 3.9% quarter-on-quarter increase in that cap, split between a 4.1% rise in the electricity cap and a 3.8% rise in gas.
Gas-price scenarios and inflation sensitivity
Ongoing uncertainty linked to the Middle East conflict has pushed U.K. natural gas prices higher in recent weeks amid constrained supply from the Gulf. Barclays constructed two scenarios for gas prices: an adverse case in which prices flatten at around 140p per therm through 2027, and a more favourable case in which prices decline to about 90p per therm by the second quarter of 2027.
Under the adverse scenario, Barclays said its January headline CPI forecast would increase by 0.1 percentage point, to 3.2% from 3.1%. The favourable scenario would lower the January forecast by 0.1 percentage point, to 3.0%.
Barclays emphasised that both outcomes lie well below the 3.7% peak projected under the Bank of England’s Scenario B published in April, and remain a distance from the roughly 4% threshold at which Bank of England research indicates second-round inflation effects become more pronounced.
Inflation expectations and policy implications
Household inflation expectations increased in August. The Citi/YouGov one-year measure rose by 0.5 percentage point to 3.9%, while the five-to-ten-year measure climbed 0.4 percentage point to 4.1%. Barclays noted these readings are below the levels recorded in March, when the Middle East conflict began, and are well under the peaks seen in 2022.
Bank of England Governor Andrew Bailey, speaking at Jackson Hole, said current evidence on second-round effects remains "subdued," allowing him to "watch this situation for the moment." Barclays expects the Monetary Policy Committee to keep rates on hold for the rest of the year, while warning that persistently elevated inflation expectations could lower the threshold for future upside surprises to sway policymakers.