- Consumer price inflation rose to 0.7% in March from a three-month low of 0.4% in February
- Inflation was primarily lifted in March by higher fuel prices compared to last year. Oil prices rose to a 13-month high last month, magnifying the impact of the significant fall in oil prices a year earlier
- Prices for clothing and for furniture and household goods also lifted inflation. However, inflation continues to be limited by the temporary VAT cut for the hospitality and leisure sectors. There was also some downward impact from food prices in March
- Core inflation rose back up to 1.1% in March after falling back markedly to a six-month low of 0.9% in February from 1.4% in January and December
- There was evidence of a pick-up in price pressures further down the supply chain. Producer input prices rose 1.3% month-on-month (m/m) and 5.9% year-on-year (y/y) in March after y/y increases of 3.3% in February and 1.6% in January. Meanwhile, producer output prices rose 0.5% m/m and 1.9% y/y after y/y increases of 0.9% in February and 0.1% in January
- March’s figures are likely to mark the start of a marked near-term rise in consumer price inflation. Unfavourable base effects resulting from the fall in oil prices in early 2020 will have a further upward impact, while energy prices for millions of consumers are rising in April as a result of an increased price cap
- An expected progressive firming of the economic recovery from early-2021 will also have some upward impact on inflation. There will also be some upward impact in October after the temporary VAT cut for the hospitality and tourism sectors is diluted to 12.5% from 5%
- Consequently, the EY ITEM Club sees consumer price inflation approaching the Bank of England’s 2% target during Q2 and then rising just above this during the second half of the year. However, inflation is not expected to rise much above 2% due to spare capacity in the economy and labour markets
- With inflation set to pick up and the economy looking poised for decent recovery after a probable modest first quarter contraction, attention is increasingly focusing on when the Bank of England could start to tighten monetary policy
- The EY ITEM Club suspects the Bank of England's ultimate next move will be to edge interest rates up from the current level of 0.10%. The EY ITEM Club believes the Bank of England is most likely to hold off from acting throughout 2021 but there is clearly a growing possibility that the Bank could tighten monetary policy in 2022 – although at the moment, early-2023 seems more likely.
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“Consumer price inflation rose back up to 0.7% in March after dipping to 0.4% in February from 0.7% in January. The consensus expectation had been for inflation to rise to 0.8% in March.
“Inflation was primarily lifted in March by higher fuel prices. Oil prices had fallen significantly early on in 2020 and the latest year-on-year increase was magnified by oil prices hitting a 13-month high this March. Petrol prices stood at 123.7p/litre in March 2021, compared with 119.4p/litre in March 2020 and a recent low of 106.2p/litre in May 2020.
“There was also an upward impact on inflation last month from higher clothing prices. Clothing prices have not followed normal seasonal patterns since early-2020 due to the impact of COVID-19. A smaller upward impact came from furniture and household goods.
“There was some downward pressure on inflation in March from food prices. Inflation also continued to be held down by the temporary VAT cut from 20% to 5% introduced last July for the hospitality sector, hotel and holiday accommodation and admission to certain attractions.
“Core inflation rose back up to 1.1% in March after dipping markedly to a six-month low of 0.9% in February from 1.4% in January and December. It had earlier climbed to this level from 0.9% in August.
“At 0.7% in March, consumer price inflation was more than one percentage point below the Bank of England’s 2.0% target rate.”
Outlook for inflation
Howard Archer adds: “March’s increase is likely to be the beginning of a marked near-term pick-up in consumer price inflation.
“Unfavourable base effects resulting from the fall in oil prices in the early months of 2020 will have a further significant near-term upward effect on inflation. This will be magnified by oil prices trading at their highest level for 13 months last month. On top of this, energy prices will rise for many consumers from April following a 9.2% increase in the price cap on the most widely used tariffs.
“An expected progressive improvement in the UK's economy from the second quarter of 2020 will also likely have some upward impact on inflation. Later in the year, there will be some upward impact on inflation in October after the temporary VAT cut for the hospitality and leisure sectors is diluted to 12.5% from 5%. There will be a further upward impact on inflation in April 2022 when the VAT rate rises back up to the full rate of 20% at the end of next March.
“There was evidence of a pick-up in price pressures further down the supply chain in March: producer input prices increased 1.3% month-on-month and 5.9% year-on-year after year-on-year increases of 3.3% in February and 1.6% in January. Meanwhile, producer output prices rose 0.5% month-on-month and 1.9% year-on-year after year-on-year rises of 0.9% in February and 0.1% in January.
“Consequently, the EY ITEM Club expects consumer price inflation to approach 2% during the second quarter and to rise just above 2% during the second half of the year. However, the EY ITEM Club does not expect inflation to rise much above 2% as there will still be excess capacity in the economy and in labour markets.”
Measuring of inflation in March affected by restrictions
Howard Archer continues: “The Office for National Statistics reported that ‘As a result of the ongoing restrictions caused by the coronavirus (COVID-19) pandemic, the number of CPIH items identified as unavailable in March 2021 was 67, accounting for 8.2% of the basket by weight; this is slightly down from 69 in February 2021; for the March 2021 price collection, we collected a weighted total of 82.2% of comparable coverage collected before the first lockdown (excluding unavailable items).’”