Why a spike in the January energy price cap could derail the 2027 inflation path
UK inflation could return to the Bank of England’s 2% target by the end of 2027, with interest rates falling from current levels, according to Darren Winder, head of Lazarus Economics and Strategy.
Winder made the prediction at the Brightstar Specialist Lending Expo 2026 at the London Stadium in early October. It runs against the current trend. UK CPI inflation rose to 3.1% in August, from 2.9% in July. The Bank of England voted 6-3 to hold Bank Rate at 3.75% in September, with three members preferring a rise to 4%.
“That’s the main prediction from today – that I come back here in 12 months’ time and we’re on track for 2% inflation,” he said. “If we’re on track for 2% inflation in 12 months’ time, interest rates will be lower than they are today.”
The outcome depends on energy prices. If oil falls from around $100 towards $80 during 2027 while gas stays near current levels, Winder said base effects should bring inflation back to 2% by the end of the year.
Energy price cap is the near-term test
Winder predicted the Government would step in to limit a sharp rise in the energy price cap in January. Without intervention, he warned, the Bank of England could forecast inflation approaching 4%, potentially pushing up market expectations for interest rates.
Ofgem raised the cap 4% to £1,723 on 1 October. Cornwall Insight forecasts a 16% rise to about £1,999 in January. The Government has not committed to specific support ahead of the 28 October Budget.
Challenging market pricing
Winder said financial markets currently point to rates close to 5% by the end of 2027. Mortgage One’s analysis of SONIA futures on 12 October implied about 4.9% by October 2027.
He said: “The market currently thinks interest rates are going to be nearly 5% by the end of 2027. I think it’s just for the birds.”
He argued that energy volatility, rather than domestic pressure, has driven much of the movement in inflation. Private-sector wage growth of around 3% and productivity growth of 1% imply unit labour costs rising about 2%, he said. ONS data put private-sector regular pay growth at 2.8% in the three months to June. Core CPI held at 2.6% in August.
Winder said: “Underlying inflationary pressures have clearly been easing, even though headline inflation is going up.”
Growth, saving and the case for cuts
Winder said annual growth had doubled over the past 12 months, from around 0.75% to 1.5%. The ONS put second-quarter growth at 1.4% on a year earlier.
“The growth rate of the economy factually has doubled in the last 12 months,” he said. “So it’s definitely getting there. It’s not there yet. Being there is 2%.”
Stronger household spending would be key to lifting growth, he said, with UK households saving around 9% to 10% of take-home income. The ONS estimated the saving ratio at 8.8% in the second quarter. Winder estimated that each one percentage point fall in the ratio could generate an additional £20 billion of consumer spending.
He said: “To me, the argument for getting interest rates down is to discourage saving more than it is to encourage borrowing.”
For advisers, the debate bears on client conversations about mortgage fixes, cash holdings and fixed-income allocation. Winder’s view contrasts with a split Monetary Policy Committee, and several data points arrive soon. CPI for September is due on 21 October, the Budget on 28 October, and the Bank’s next rate decision on 5 November.
