Press release

18 Nov 2020 London, GB

Consumer price inflation up to 3-month high of 0.7% in October – EY ITEM Club comments

Consumer price inflation was slightly higher than expected at a 3-month high of 0.7% in October. This was up from 0.5% in September and 0.2% in August (the lowest since January 2016).

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  • Consumer price inflation was slightly higher than expected at a 3-month high of 0.7% in October. This was up from 0.5% in September and 0.2% in August (the lowest since January 2016)
  • At 0.7%, inflation is still low and will help consumers' purchasing power amid rising unemployment and the prospect of limited pay increases
  • Upward pressure on consumer price inflation in October primarily came from clothing & footwear prices which have not followed normal seasonal patterns this year due to the impact of COVID-19 on sales. There was also a significant upward impact from food prices
  • Core inflation rose to 1.5% in October from 1.3% in September
  • There was evidence of limited price pressures further down the supply chain with producer input prices falling 1.3% year-on-year as they rose just 0.2% month-on-month. Meanwhile, producer output prices were down 1.4% year-on-year as they were flat month-on-month
  • Price conscious consumers, excess capacity, limited earnings and curtailed economic activity are likely to limit inflation in the near-term at least
  • The EY ITEM Club expects consumer price inflation to hover close to 0.5% for the rest of 2020 and into early-2021 before starting to trend up gradually from Q2 2021 after the temporary VAT cut ends in March. Unfavourable base effects resulting from the fall in oil prices in early 2020 will also have an upward impact on inflation early on in 2021. An expected gradual firming of the recovery after early-2021 could also have some upward impact on inflation. Inflation is unlikely to rise quickly and could be around 2.0% by the end of 2021
  • With inflation substantially below its 2% target, the Bank of England will feel that scope remains for further stimulus action to support the UK economy if deemed necessary; the Bank delivered an additional £150bn of asset purchases at the November MPC meeting

Howard Archer, chief economic advisor to the EY ITEM Club, says:

“Consumer price inflation rose a little more than expected to a three-month high of 0.7% in October. This was up from 0.5% in September and 0.2% in August, which had been the lowest level since January 2016. The consensus expectation had been for inflation to edge up to 0.6%. Inflation had reached a four-month high of 1.0% in July from 0.5% in May. The 2020 high was 1.8% in January.

“At 0.7%, consumer price inflation was still more than one percentage point below the Bank of England’s 2.0% target rate.

“Upward pressure on inflation in October primarily came from clothing & footwear, where prices have followed different seasonal patterns than normal due to the impact of COVID-19 on sales. There was also a significant upward impact on inflation from food prices, while other upward impacts came from furniture, furnishings & carpets and from transport.

“A modest downward impact on inflation in October came from recreation & culture prices. Inflation continues to be held down by the temporary VAT cut (from 20% to 5%) that was introduced in mid-July and which will last through to the end-March 2021. This affects the hospitality sector, hotel and holiday accommodation and admission to certain attractions.

“Core inflation rose to 1.5% in October from 1.3% in September and 0.9% in August. It had previously halved to August’s level of 0.9% from 1.8% in July. It had earlier climbed to 1.8% in July from 1.4% in June and 1.2% in May.

“Inflation had been significantly lifted in September from the August low by the ending of the Government’s ‘Eat Out to Help Out’ discount scheme. This ran throughout August and had been a major factor in the fall in inflation compared to July. There was also an appreciable upward impact from transport prices in their first positive contribution since March, as they were lifted by air fares falling less than normal between August and September."

Outlook for inflation

Howard Archer adds: “The EY ITEM Club expects consumer price inflation to hover close to 0.5% throughout the rest of 2020 and early-2021 before starting to trend up gradually. There should be some unwinding of October’s upward impact from clothing & footwear prices in November.

“Price conscious consumers, excess capacity, limited earnings and curtailed economic activity are likely to limit inflation in the near term at least.

“While the economy saw a substantial bounce back in the third quarter, with GDP growth of 15.5% quarter-on-quarter, it is highly likely to suffer renewed contraction in the fourth quarter due to the introduction of a second national lockdown in England from 5 November to 2 December. This will increase excess spare capacity in the economy. Meanwhile, unemployment looks likely to rise significantly over the coming months despite the Chancellor extending the furlough scheme to March. Along with limited earnings, rising unemployment will weigh on consumers and constrain their spending. Limited earnings will also have a dampening impact on inflation.

“The EY ITEM Club expects inflation to start rising from the second quarter of 2021 after the temporary VAT cut ends at the end of March. Unfavourable base effects resulting from the fall in oil prices in the early months of 2020 will also have an upward effect on inflation in the early months of 2021. An expected gradual firming of the recovery after early-2021 will also likely have some upward effect on inflation, but inflation is unlikely to rise quickly and could be around 2.0% by the end of 2021.

“There was evidence of limited price pressures further down the supply chain in October with producer input prices falling 1.3% year-on-year as they rose just 0.2% month-on-month. Meanwhile, producer output prices were down 1.4% year-on-year as they were flat month-on-month.”

Inflation measurement challenge has eased

Howard Archer adds: “The Office for National Statistics (ONS) has reported that inflation has been difficult to measure in recent months due to the restrictions caused by COVID-19 – although the situation has recently improved. The ONS reported that the number of items normally in the inflation basket that were unavailable to consumers in October was eight. The unavailable items account for 1.1% of the CPIH basket by weight.”