Press release

16 Dec 2020 London, GB

Consumer price inflation down to 0.3% in November – EY ITEM Club comments

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Related topics Growth COVID-19
  • Consumer price inflation fell back more than expected to a three-month low of 0.3% in November. This was down from a three-month high of 0.7% in October
  •  November’s level of 0.3% was only just above the 0.2% recorded in August, which had been the lowest level since January 2016
  • Very low inflation is supportive to consumers' purchasing power amid rising unemployment and the prospect of limited pay increases
  • Inflation was primarily brought down in November by clothing & footwear prices, which have not followed normal seasonal patterns this year due to the impact of COVID-19. Downward pressure also came from food prices and non-alcoholic beverage prices. Additionally, inflation continues to be limited by the temporary VAT cut for the hospitality sector
  • Core inflation moderated to 1.1% in November after rising to 1.5% in October from 1.3% in September
  • There was evidence of limited price pressures further down the supply chain in November with producer input prices falling 0.5% year-on-year as they rose a modest 0.2% month-on-month. Meanwhile, producer output prices were down 0.8% year-on-year as they also rose a modest 0.2% month-on-month
  •  The EY ITEM Club believes consumer price inflation is likely to edge up to 0.5% in December (partly due to the downward impact from clothing and footwear unwinding) and then hover around this level during early-2021, before starting to trend up gradually from Q2. Price conscious consumers, excess capacity, limited earnings and curtailed economic activity are likely to limit inflation in the near term at least
  •  Inflation will rise in 2021 once the temporary VAT cut for the hospitality sector ends in March. Unfavourable base effects resulting from the fall in oil prices in early 2020 will also have an upward impact. An expected gradual firming of the recovery from early-2021 could also have some upward impact on inflation, but it is unlikely to rise quickly and could be around 2.0% by the end of 2021
  • In a ‘no deal’ scenario for the UK and EU, the EY ITEM Club suspects consumer price inflation could reach 3% during 2021 before easing back due to a net upward impact from tariffs and a likely marked weakening of sterling
  • With inflation substantially below its 2% target at just 0.3% in November, the Bank of England is likely to take further stimulus action to support the UK economy if necessary
  • However, the Bank of England is odds-on to sit tight on Thursday, keeping interest rates at 0.10% and the planned stock of asset purchases at £895bn 
  • In a ‘no deal’ scenario, the EY ITEM Club believes the Bank of England would be likely to respond with more stimulus. This would almost certainly involve asset purchases, while negative interest rates may become more likely

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

“Consumer price inflation fell back much more than expected to a three-month low of 0.3% in November, having risen to a three-month high of 0.7% in October. This had been up from 0.5% in September and 0.2% in August. August’s level had been the lowest since January 2016. The consensus expectation – and the EY ITEM Club’s own expectation – had been for inflation to dip to 0.6% in November.

“Inflation was primarily limited in November by clothing & footwear, where prices have followed different seasonal patterns than normal due to the impact of COVID-19 on sales. Downward pressure on inflation in November also came from food prices and non-alcoholic beverage prices. The ONS also indicated that the price fall in November this year reflects increased discounting, while there have been media reports that some Black Friday sales may have spread further across the month.

“Additionally, inflation continued to be held down by the temporary VAT cut introduced in mid-July – and which will last through to end-March 2021 – for the hospitality sector, hotel and holiday accommodation and admission to certain attractions.

“Core inflation moderated to 1.1% in November after rising 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.

“At 0.3%, consumer price inflation was much more than one percentage point below the Bank of England’s 2.0% target rate.”

Outlook for inflation

Howard Archer adds: “The EY ITEM Club suspects consumer price inflation will likely edge back up to 0.5% in December – partly due to the downward impact from clothing and footwear unwinding – and then hover around this level through early-2021 before starting to trend up gradually. Price conscious consumers, excess capacity, limited earnings and curtailed economic activity are likely to limit inflation in the near term at least.

“Following its substantial bounce back in the third quarter, the economy is highly likely to see a renewed – albeit modest – contraction in the fourth quarter due to England’s second national lockdown and the still-appreciable restrictions on activity thereafter. This will increase excess spare capacity in the economy. Meanwhile, unemployment looks likely to continue to rise over the coming months, despite the extension of the furlough scheme to March. Along with limited earnings, this will constrain consumer 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 as the temporary VAT cut for the hospitality sector 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 impact. Despite these factors, 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 November with producer input prices falling 0.5% year-on-year as they rose 0.2% month-on-month. Meanwhile, producer output prices were down 0.8% year-on-year as they also rose a modest 0.2% month-on-month.”

“Should the UK ultimately leave the EU without a trade deal, the EY ITEM Club suspects consumer price inflation could reach 3% during 2021 before easing back, due to a net upward impact from tariffs and a likely marked weakening of sterling.” 

Bank of England set to keep monetary unchanged on Thursday

Howard Archer concludes: “With consumer price inflation substantially below its 2% target at just 0.3% in November, the Bank of England will feel that ample scope remains for it to take further stimulus action to support the UK economy – if deemed necessary – over the coming months.

“The Bank of England is odds-on to sit tight on Thursday following the December Monetary Policy Committee (MPC) meeting, keeping interest rates at 0.10% and the planned stock of asset purchases at £895bn. Having added another £150bn of asset purchases in November, and with the economy showing resilience in the face of the November lockdown and other restrictions, there seems little imminent need at least for further action by the Bank of England. The recent positive developments associated with the vaccine have seemingly diluted the downside risks to the economic outlook.

“However, the outlook for monetary policy could change should the UK and EU not reach a deal on a free trade agreement by the end of the year. The EY ITEM Club believes the Bank of England would be likely to respond with more stimulus to support the economy. This almost certainly would involve more asset purchases, while a move to negative interest rates would become more likely.”

Measuring of inflation in November affected by restrictions

Howard Archer continues: “The Office for National Statistics (ONS) reported that as “a result of the increased restrictions caused by the coronavirus (COVID-19) pandemic, 72 CPIH items were identified as unavailable in November, accounting for 13.9% of the basket by weight; the number has increased from eight in October but is down from 90 in April, the first full month of lockdown; for November, we collected a weighted total of 83.8% of comparable coverage collected before the first lockdown (excluding unavailable items).”