17 December 2025
Headline inflation in the UK is trending down, and the headlines are celebrating. But beneath the surface of this improvement lays a policy shift that risks distorting more than just the data. Earlier this year, the UK government removed the green energy levy from household energy bills - a politically popular move in a cost-of-living crisis. Instead of disappearing, those costs have been shifted into general taxation.
This sleight of hand may reduce inflation as measured by the Consumer Price Index (CPI), but it does not reduce the real burden on households or the economy. For investors and policymakers alike, it raises a critical question: are we seeing genuine falling inflation or just better packaging?
The Energy Price Guarantee and associated levies were, until recently, included in household utility bills, making energy inflation highly visible to the average consumer. Removing them from bills and absorbing them via central government accounts may change the statistical optics, but it doesn’t remove the cost. It simply changes who pays and how transparently.
This move coincided with a headline drop in UK inflation figures, helping to support consumer sentiment and offering the Bank of England (limited) political breathing room on rates. But for financial markets, the distinction between falling inflation and cost reallocation matters. One suggests improving fundamentals; the other suggests accounting trickery.
If investors are pricing gilts, risk assets, and real-return strategies based on CPI that no longer reflects the lived experience of UK households, misallocation becomes inevitable.
Bond investors may prematurely assume that the Bank of England will cut rates or that the inflation cycle has meaningfully cooled. Equities could respond to what appears to be recovering consumer confidence, when in reality, discretionary spending remains constrained. Asset managers building inflation-sensitive portfolios - especially those relying on inflation-linked bonds or tangible assets - may be misled by artificially clean data.
This has already led to recalibrated inflation expectations in the swaps and futures markets. But if these expectations are grounded in adjusted data rather than true economic slack, the risk of a policy error increases.
Perhaps the most serious consequence of this kind of policy shift is the erosion of trust.
Market participants rely not only on economic outcomes but also on consistent, transparent metrics. When governments begin to “engineer” lower inflation by shifting liabilities out of the consumer view, they risk undermining the credibility of those metrics - and by extension, the credibility of policy responses that rely on them.
The UK isn’t the first to walk this line. From the core vs headline inflation debate in the U.S. to historical arguments over RPI versus CPI, the manipulation, or even perceived manipulation, of inflation data has long been a flashpoint for investors.
However, if trust in inflation data weakens, so does trust in the policies designed to control it.
Let’s be clear: the green energy levy hasn’t vanished. It's merely been rerouted into the Treasury’s balance sheet. That cost, estimated in the billions, is now part of public borrowing, not private consumption.
This adds another layer of complexity for sovereign debt investors. The UK’s fiscal position remains tight, with rising public service demands and limited room for meaningful tax increases. While the short-term political optics of “lower” inflation are attractive, the medium-term risk is that growing off-balance-sheet fiscal obligations erode the sustainability of the UK’s debt trajectory.
This becomes especially pertinent for gilt investors, who are already navigating high issuance volumes, global rate volatility, and uncertain forward guidance from the Bank of England.
What’s happening in the UK may be a warning sign of a broader trend. Around the world, governments are under pressure to cool inflation without stalling growth - particularly in election cycles. The temptation to use fiscal manoeuvres to suppress headline CPI is rising.
We’ve seen it in the U.S. with strategic energy reserve releases, in Europe through subsidy-heavy energy relief programs, and in Asia via currency interventions to manage import costs. These levers may offer short-term relief, but they also blur the link between inflation readings and real economic stress.
For global investors, particularly those managing cross-border fixed-income or macro strategies, this environment demands greater scrutiny. Relying on published inflation prints is no longer enough. The question is not just what inflation is doing, but who is paying for it, and how?
Inflation is not just a number; it’s a signal, and when that signal is distorted by policy, markets lose a key compass. The UK’s move to partially bury energy costs in the public purse may soften the political noise around inflation in the short term. Still, it risks creating new dislocations in trust, transparency, and long-term portfolio positioning.
For professional investors, the takeaway is simple: look beyond the CPI print. Model the policy risk, and don’t confuse falling inflation with disappearing costs - especially when it’s only shifted from the bill to the budget.
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