- July’s fall in inflation was largely due to base effects and the unwinding of earlier spikes in volatile categories. This is likely to represent only a brief slowdown in price rises for consumers. The EY ITEM Club expects CPI inflation to rebound significantly in August and says it is likely to reach 3.5% before the end of the year.
- The end of the temporary VAT cut for hospitality, a double-digit rise in the energy price cap and rising global goods prices will push up in inflation in H2 2021. But the pickup should prove transitory, with inflation set to cool in 2022.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“CPI inflation slowed from 2.5% in June to 2.0% in July. The ONS attributed almost half of the slowdown to strong base effects caused by a spike in the price of services last year when the economy reopened after the first lockdown. Alongside this, some of the recent price rises in the volatile clothing and recreation and culture categories unwound, suggesting that the pandemic had temporarily altered seasonal pricing patterns. But there was some offset from another significant rise in petrol prices.
“July’s data is likely to represent brief respite from the upward movement in inflation rates. August will see base effects push annual inflation up again, with last August having seen both the VAT cut for the hospitality sector and the Eat Out to Help Out scheme. Indeed, it could be possible that the annual CPI rate will rise by as much as one percentage point between July and August.
“In addition, inflation is likely to rise further over the remainder of the year due to the partial reversal of the VAT cut, October’s 12% rise in the energy price cap, and the prospect of further upward pressures on global goods prices from component shortages and supply chain challenges. The EY ITEM Club expects the CPI rate to peak at around 3.5% at year-end, but we continue to think the rise will prove transitory and expect inflation to cool as we move through 2022.”