28 May 2026: The energy bill hike has made Reeves look powerless

Prospective Labour Party leader Andy Burnham has accused former leader and Prime Minister Tony Blair of being out of touch with modern politics following Blair’s recent expression of concerns that the Party may be lurching too far to the left.

Andy Burnham’s accusation is part of a broader, very public clash between Labour’s past and its would-be future. The core of it is simple: Burnham argues that Tony Blair no longer understands the forces shaping 2020s politics, especially inequality, and therefore misreads why the political centre has collapsed.

The two have very different views on how the Labour Party should be positioned to recover from the disastrous recent local election results.

Blair believes that the Party lacks a clear set of policies to provide direction and form a framework on which decisions could be based. He is concerned that the Party wants to be all things to all men, while it needs to concentrate on growing the economy, repairing the NHS, and lowering both the cost of living and wider inflation.

Meanwhile, Burnham, who is very much to the left of Blair politically, leans heavily on his time as Mayor of Greater Manchester, during which he has tried to meld a homespun version of socialism with his efforts to create a northern powerhouse that is more independent of London.

Members of the Party are relieved that senior officials are at least talking policy again after a period since it took over at Westminster, when personalities have dominated policy.

There is no doubt that Burnham’s “star” is in the ascendant, but he still has the small matter of the Makerfield by-election to contest on June 18th. Failure to win that, which is by no means a certainty, could make matters even worse, since the issues surrounding Keir Starmer’s leadership will be left for current and recent Cabinet Members to fight over.

This would be unlikely to galvanise voters into having any more confidence than they have now.

It is hard to think about energy bills during the recent heatwave. Still, the Energy Regulator has confirmed that the war in Iran means a household using a typical amount of gas and electricity will pay £221 more a year, bringing the annual bill to £1,862.

The cap affects millions of homes on variable tariffs in England, Scotland and Wales, and suppliers warn it could go even higher in the colder winter months if the conflict continues.

Energy costs have rocketed since Iran responded to US and Israeli attacks by effectively blocking the crucial Strait of Hormuz shipping route.

The jump in bills will amount to a £ 18-a-month rise for the average household using both electricity and gas, with households seeing increases of 24% on their gas bills and 5% on their electricity bills. Standing charges are almost unchanged.

The energy cap covers 33 million households in England, Wales and Scotland. Regulations and bills are different in Northern Ireland.

With the electorate very concerned about the cost of living and with no end to the War in sight, a discount on entry to theme parks this summer is not going to cut it.

Sterling was broadly flat to slightly softer in yesterday’s trading, with only marginal moves against both the euro and the dollar.

The pound showed little directional movement, drifting slightly lower against the euro and essentially unchanged against the dollar. It fell to a low of 1.3416 and closed at 1.3426.

Investors increasingly expect the dollar to move higher, and the reasoning is well grounded in both market pricing and macroeconomic conditions. Across recent reporting, the common thread is that the Federal Reserve’s renewed focus on inflation, combined with rising Treasury yields and elevated oil prices, is pushing expectations towards a stronger USD.

Minneapolis Fed President Neel Kashkari warned yesterday that the Central Bank could begin a “series of” rate hikes. However, the next monetary policy move will ultimately depend on how the U.S.-Iran war plays out.

The Fed has wrested the mantle of the most hawkish G7 Central Bank from the ECB, with a rate hike next month considered “baked in,” while both the ECB and the BoE consider their options.

This will not be the start that either Kevin Warsh or Donald Trump envisioned when Warsh was first touted for the role of Chairman.

The second quarter has been tough for traders in the foreign exchange markets, with overnight developments often leaving them “stopped out” of positions as the market was “whipsawed”, leaving them with little confidence.

This has led to a bout of short-termism in which even medium-term investors have become “day traders”.

In another hawkish development from the FOMC, Lorie Logan, the President of the Dallas Fed, told reporters that she believes the world may be compelled to cut back on oil and gas consumption if the Strait of Hormuz remains closed for an extended period due to the ongoing U.S.-Israeli war on Iran.

The U.S. would be relatively comfortable with this development, given its near self-sufficiency in energy. Still, it could prove a major concern for China, which is already struggling with the effects of the Strait's closure.

Logan, in remarks prepared for a Bank of Japan conference, said that if shipping through the strait does not return to pre-war levels soon, global oil and natural gas consumption might need to fall more sharply than so far, given the highly constrained supplies. She noted that the economic impact would hinge on whether end users can shift to alternative energy sources or improve energy efficiency, rather than reducing activity.

According to a recent Dallas Fed survey, U.S. oil executives anticipate increases in domestic oil output of only 250,000 barrels per day this year and 500,000 barrels per day next year. Logan pointed out that this compares with a daily reduction of around 13 million barrels in the global oil supply since the start of the Iran war, a shortfall currently being offset largely by drawing down existing inventories.

Last year, growth slowed modestly amid a fiscal contraction and a tariff shock, but remained well short of recessionary levels. Overall, the U.S. economy grew at a slightly below-average rate and once again showed its resilience in the face of several headwinds.

Through the first and a half quarters of this year, the outcome has remained the same, but this time the headwinds have taken the form of an energy shock. So far, the U.S. economy is passing its latest test with flying colours.

The Fed is far more concerned about inflation than about recessionary signals emanating from the economy. The AI boom is leading to some adjustments in hiring, but so far those have been comfortably absorbed.

Adding to the concerns over rising inflation, Federal Reserve Governor Lisa Cook warned that inflation risks are increasingly skewed to the upside, even though she currently favours keeping interest rates unchanged. Speaking at a policy forum at Stanford University, Cook said the Fed should continue to hold rates steady “from a risk-management perspective,” but stressed that policymakers must remain prepared to tighten further if inflation fails to ease promptly.

Cook acknowledged that inflation is “clearly moving in the wrong direction,” citing tariffs, the Iran conflict, rising oil prices, and surging AI-related investment as major drivers of renewed price pressures. She pointed specifically to rising energy and fertilizer costs, as well as stronger demand for chips, software, and construction workers linked to the rapid expansion of AI data centres.

The dollar index is currently in a “holding position,” awaiting Fed action. Yesterday, it reached a high of 99.26 comfortably within its recent range and closed at 99.23.

The European Central Bank has warned that an escalation of the conflict in the Middle East, combined with global trade tensions, could weaken economic growth in the eurozone and pose risks to financial stability.

In its twice-yearly Financial Stability Review, the ECB said a sharper-than-expected slowdown linked to a prolonged energy shock could raise concerns about government finances and prompt a sudden repricing in sovereign bond markets. This has already begun in some cases, possibly in anticipation of market concerns.

The Bank said higher borrowing needs among European Governments, driven by increased defence spending, investment in the green transition and potential support measures for households and businesses facing higher energy costs, could add to fiscal pressures in the medium term.

Despite the geopolitical risks, financial markets have largely remained resilient. Stock valuations have stayed elevated, corporate borrowing costs have remained relatively low, and yield spreads between eurozone sovereign bonds have stayed narrow, prompting concerns that investors may be underpricing risk.

Earlier this month, Bank of Greece Governor Yannis Stournaras warned that the risk of the eurozone slipping into recession if the Middle East conflict persists is “real and justified,” adding that the European economy is losing momentum.

ECB Vice President Luis de Guindos characterised the current situation as a global supply shock that will ultimately lead to lower economic growth and higher inflation.

He said that while the overall net impact is inflationary, the resulting economic slowdown is already weakening aggregate demand, as seen in declining sentiment indicators and services PMIs, which could slightly temper those inflationary pressures.

He reiterated that the ECB will closely monitor inflation expectations and "second-round effects" to guide its upcoming monetary policy decisions.

The consensus in the Governing Council is to deliver an "insurance hike" in June and then pause at least until September to see how economic data and the US-Iran situation evolve over the summer. Isabel Schnabel and Joachim Nagel expressed this view, but it remains unclear whether they form a majority on the Governing Council.

The market is pricing in a 93% chance of a rate hike in June and a total of 57 bps of tightening by year-end.

De Guindos will leave his role tomorrow, to be replaced from June 1st by Boris Vujcic.

Much of what de Guindos said was echoed by Chief Economist Philip Lane, who told Nikkei Asia that the conflict in the Middle East has worsened the Eurozone’s macroeconomic outlook, heightening uncertainty. Elevated energy prices are weighing on consumption and investment, potentially leading to prolonged economic weakness.

While gas prices remain relatively stable thanks to US supply, oil prices have exceeded the ECB’s March projections. Lane expects the ECB to make a further upward adjustment to its inflation forecast at the June meeting, reflecting these net upward pressures.

The ECB is monitoring whether energy shocks will broaden into broader inflation. While some sectors, such as transport, initially raised prices, others are now reversing those increases as demand falls, indicating that demand conditions in Europe remain weak.

Lane emphasised that the ECB does not pre-commit to specific interest rate paths. He outlined three scenarios for monetary policy in response to the energy shock: ignoring a temporary shock; a limited response to a persistent, medium-sized shock; or a strong response if the shock broadens significantly.

The Euro is currently “making up the numbers” as traders focus on U.S. events. Yesterday, the common currency fell to a low of 1.1622 and closed at 1.1625.

Have a great day!