Press release

17 Feb 2021 London, GB

Consumer price inflation edged up to 0.7% in January and looks set to pick up further from Q2 – EY ITEM Club comments

Consumer price inflation unexpectedly edged up to a four-month high of 0.7% in January from 0.6% in December and a three-month low of 0.3% in November. January’s level was the equal highest level (with October) since last July.

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Related topics Growth COVID-19
  • Consumer price inflation unexpectedly edged up to a four-month high of 0.7% in January from 0.6% in December and a three-month low of 0.3% in November. January’s level was the equal highest level (with October) since last July
  • Inflation is still relatively low and supportive to consumers' purchasing power amid rising unemployment and the prospect of limited pay increases
  • Upward pressure on inflation in January came from furniture and household goods, restaurants and hotels, food and non-alcoholic beverages and transport prices
  • Downward pressure came from clothing prices, which have not followed normal seasonal patterns since early-2020 due to the impact of COVID-19. Inflation also continues to be limited by the temporary VAT cut for the hospitality and leisure sectors while there was also a dampening impact in December from food prices
  • Core inflation was stable at 1.4% in January after rising to this level in December from 1.1% in November
  • There was evidence of a pick-up in price pressures further down the supply chain in January although they were still limited. Producer input prices increased 1.3% year-on-year (y/y) in January after an increase of just 0.6% in December as they rose 0.7% month-on-month (m/m). Meanwhile, the y/y drop in producer output prices narrowed to 0.2% in January from 0.5% in December as they rose 0.4% m/m
  • The EY ITEM Club expects consumer price inflation to hover around 0.7% during early-2021 before starting to trend up from Q2. Price conscious consumers, excess capacity, limited earnings and curtailed economic activity are likely to limit inflation in the immediate term
  • Inflation is expected to rise further once the temporary VAT cut for the hospitality and leisure sectors ends in March. Unfavourable base effects resulting from the fall in oil prices in early 2020 will also have an upward impact, magnified by the recent rise in oil prices to a one-year high. Energy prices for millions of consumers will rise in April once the price cap rises. After a challenging Q1, an expected progressive firming of the economic recovery from early-2021 will also have some upward impact on inflation
  • Consequently, the EY ITEM Club sees consumer price inflation rising just above 2% (the Bank of England’s target level) by the end of 2021. However, inflation is not expected to rise much above that level as there will still be spare capacity in the economy and labour markets
  • With inflation still substantially below its target in January, the door is very much open for the Bank of England to take further stimulus action to support the UK economy. However, the EY ITEM Club believes that the case for further Bank of England support for the economy will wane from Q2 as the recovery develops alongside the COVID-19 vaccines roll-out. 

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

“Consumer price inflation unexpectedly edged up to a four-month high of 0.7% in January. This was up from 0.6% in December and a three-month low of 0.3% in November. January’s inflation was at the equal highest level – with October – since last July. The consensus expectation had been for inflation to dip to 0.5% last month. 

“Consumer price inflation had averaged 0.9% over 2020, down from 1.8% in 2019 and 2.5% in 2018. It reached a low of 0.2% in August, which had been the weakest consumer price inflation level since January 2016. 

“Upward pressure on inflation in January came from furniture and household goods, restaurants and hotels, food and non-alcoholic beverages and transport prices. 

“However, the Office for National Statistics stated that it had not seen any obvious evidence that inflation had been pushed up in January by extra costs and added regulations resulting from the new UK-EU relationship.

“Downward pressure on inflation came from clothing prices, which have not followed normal seasonal patterns since early-2020 due to the impact of COVID-19. 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 was stable at 1.4% in January after rising to this level in December from 1.1% in November. It had been as low as 0.9% in August.

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

Measuring of inflation in January more affected by restrictions

“The Office for National Statistics reported that “as a result of increased restrictions caused by the coronavirus (COVID-19) pandemic in January 2021, the number of CPIH items identified as unavailable was 69, accounting for 8.3% of the basket by weight; this number rose from nine in December 2020 but was lower than the 72 items that were unavailable during the last lockdown in November 2020; for the January 2021 price collection (which took place on or around 12 January 2021), we collected a weighted total of 88.2% of comparable coverage collected before the first lockdown (excluding unavailable items).””

Outlook for inflation

Howard Archer adds: “The EY ITEM Club expects consumer price inflation to hover close to 0.7% through the first quarter of 2021. Price conscious consumers, excess capacity, limited earnings and curtailed economic activity are likely to limit inflation in the immediate term.

“The EY ITEM Club expects inflation to start rising faster from the second quarter of 2021 once the temporary VAT cut for the hospitality and leisure sectors 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. This will be magnified by oil prices recently trading at their highest level for 13 months. Additionally, energy prices will rise for many consumers from April following Ofgem's decision to raise the cap on the most widely used tariffs by 9.2%.

“An expected progressive firming of the recovery from the second quarter will also likely have some upward impact on inflation.

“There was evidence of a pick-up in price pressures further down the supply chain in January although they were still pretty limited. Producer input prices increased 1.3% year-on-year in January after an increase of just 0.6% in December as they rose 0.7% month-on-month. Meanwhile, the year-on-year drop in producer output prices narrowed to 0.2% in January from 0.5% in December as they rose 0.4% month-on-month.

“Consequently, the EY ITEM Club expects consumer price inflation to rise just above 2% by the end of 2021. However, the EY ITEM Club does not expect inflation to rise much above that level as there will still be excess capacity in the economy and in labour markets.

“With inflation still substantially below its 2% target, the door is very much open for the Bank of England to take further stimulus action to support the UK economy if necessary.

“However, the EY ITEM Club believes that the case for further Bank of England support for the economy will wane from the second quarter as the recovery develops alongside the COVID-19 vaccines roll-out. Consequently, the EY ITEM Club takes the view that the Bank of England is most likely to hold off from acting through 2021, keeping interest rates at 0.10% and the targeted stock of asset purchases at £895bn.”