Press release

19 May 2021 London, GB

Consumer price inflation up to 1.5% in April and looks set to pick up further in the near term – EY ITEM Club comments

Consumer price inflation more than doubled in April to a 13-month high of 1.5% – up from 0.7% in March and 0.4% in February.

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  • Consumer price inflation more than doubled in April to a 13-month high of 1.5% – up from 0.7% in March and 0.4% in February
  • Inflation was primarily lifted by higher fuel and energy prices compared to a year earlier. Also lifting inflation were prices for clothing, furniture and household goods. There was some downward pressure from recreation and culture prices
  • Inflation continues to be limited by the temporary VAT cut for the hospitality and leisure sectors
  • Core inflation rose to 1.3% in April from 1.1% in March and a six-month low of 0.9% in February
  • There was evidence of an appreciable pick-up in pressures further down the inflation chain as a result of higher commodity prices and supply chain issues. Producer input prices rose 1.2% month-on-month (m/m) and 9.9% year-on-year (y/y) in April after y/y increases of 6.4% in March and 3.2% in February. Meanwhile, producer output prices rose 0.4% m/m and 3.9% y/y, up markedly from y/y increases of 2.3% in March and 1.1% in February
  • Further rises in consumer price inflation are highly likely. Unfavourable base effects resulting from the fall in oil prices in early 2020 will continue to provide upward pressure, and some of the increased input prices are likely to be passed on. An expected robust recovery from Q2 2021 will also likely have some upward effect on inflation, as will the wind-down of the temporary VAT cut for the hospitality and tourism sectors – this will be diluted to 12.5% from 5% at the end of September
  • Consequently, the EY ITEM Club sees consumer price inflation approaching – and possibly reaching – 2% by midyear and then rising to a peak around 2.7% in late-2021/early-2022. The EY ITEM Club does not expect inflation to sustain this level and expects it to ease back towards 2% as 2022 progresses given there will still be spare capacity in the economy and labour markets. Additionally, supply chain issues are likely to ease
  • With inflation set to pick up further and the economy looking poised for decent recovery from Q2, attention is increasingly focusing on when the Bank of England could start to tighten monetary policy rather than providing further stimulus. However, the Bank of England did not appear to be in a hurry to tighten policy in the minutes of the May MPC meeting
  • The EY ITEM Club believes the Bank of England is likely to hold off from acting throughout 2021, but there is a growing possibility that the Bank could tighten monetary policy in 2022 initially through edging interest rate up from 0.10% – although, currently, early-2023 seems more likely.

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

“Consumer price inflation more than doubled to a 13-month high of 1.5% in April from 0.7% in March. In March it had risen significantly from 0.4% in February. The consensus expectation had been for inflation to rise to 1.4% in April.

“Inflation was primarily lifted by higher housing and household services costs and higher fuel and energy prices. Oil prices had fallen significantly early on in 2020 and the year-on-year increase was magnified by prices reaching a 13-month high this March. The Office for National Statistics (ONS) reported that ‘following the contribution from motor fuels becoming positive in March 2021 (having been negative since March 2020), it increased by 0.21 percentage points between March and April 2021 reflecting a 12-month inflation rate for motor fuels of 13.6% – the largest annual increase since March 2017.’ Additionally, there was a 9.2% rise in the energy price cap which affected millions of customers.

“There was also upward effect on inflation in April from higher clothing prices. Clothing prices have not followed normal seasonal patterns since early-2020 due to the impact of COVID-19. Meanwhile, there was some downward pressure on inflation from recreation and culture prices.

“Inflation continued to be held down in April 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 to 1.3% in April from 1.1% in March and a six-month low of 0.9% in February.

“At 1.5% in April, consumer price inflation was back within one percentage point of the Bank of England’s 2.0% target rate.”

Outlook for inflation

Howard Archer adds: “Further rises in consumer price inflation are highly likely after April’s increase. Unfavourable base effects resulting from the fall in oil prices in early 2020 will continue to have a have an appreciable upward impact. This will be magnified by oil prices trading at their highest level for 13 months during March, and some of the increased input prices are likely to be passed on. An expected robust recovery from the second quarter will also likely have some upward impact on inflation.

“Indeed, there was evidence of an appreciable pick-up in pressures further down the inflation chain in April as a result of higher commodity prices and supply chain issues. Producer input prices rose 1.2% month-on-month and 9.9% year-on-year in April after year-on-year increases of 6.4% in March and 3.2% in February. Meanwhile, producer output prices rose 0.4% month-on-month and 3.9% year-on-year, up from year-on-year increases of 2.3% in March and 1.1% in February.

“An expected progressive improvement in the UK’s economy from Q2 2020 will also likely have some upward impact on inflation, as will the dilution of the temporary VAT cut for the hospitality and leisure sectors – to 12.5% from 5% – at the end of September. There will be further upward pressure on inflation in April 2022 when the VAT rate rises back up to the full rate of 20% at the end of next March.

“Consequently, the EY ITEM Club sees consumer price inflation approaching – and possibly reaching – 2% by midyear and then rising to a peak around 2.7% in late-2021/early-2022.

“However, the EY ITEM Club does not expect inflation to sustain this level and expects it to ease back towards 2% as 2022 progresses given there will still be spare capacity in the economy and labour markets, while supply chain issues are likely to ease.”

Measuring of inflation in April less affected by restrictions

Howard Archer adds: “The ONS reported that ‘as a result of the easing of coronavirus restrictions, the number of CPIH items identified as unavailable in April 2021 fell to 28, accounting for 3.1% of the basket by weight; we collected a weighted total of 77.2% of comparable coverage collected before the first lockdown (excluding unavailable items).’”