- Though CPI inflation reached its highest rate in more than nine years in August, the pickup was mostly due to base effects and upward pressures remain relatively narrowly focused on a small number of sectors.
- With the partial reversal of the VAT cut for hospitality and a 12% rise in the energy price cap still to come, inflation will move higher over the rest of the year. However, the EY ITEM Club continues to expect the rise to prove transitory, with all measures of inflation likely to slow through 2022.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“CPI inflation accelerated to 3.2% in August, up from 2.0% in July, and reached its highest rate since March 2012. The vast majority of August’s rise was due to comparisons with a weak 2020, with last August having seen both the VAT cut for the hospitality sector and the Eat Out to Help Out scheme. There was also a 0.2 percentage point contribution from the recreation and culture category, continuing the pattern of volatile month-on-month movements seen through the pandemic and which appears to be caused by changes to normal seasonal pricing patterns. But overall, the upward pressures remain relatively narrowly focused, with only half of the 12 categories used in the consumer spending basket currently reporting above target inflation.
“Base effects are likely to cause a temporary fall in inflation in September. But this will represent only temporary respite, with two factors set to cause a further pickup in inflation rates in October. The VAT rate for the hospitality sector will be partially reversed (the rate is due to rise from 5% to 12.5%), while October will also see a 12% rise in the energy price cap.
“Factoring in the likelihood of further upward pressures on global goods prices from component shortages and supply chain bottlenecks, the EY ITEM Club expects the CPI rate to peak in the region of 3.5% at year-end. However, the EY ITEM Club continues to think the rise will prove transitory and expects inflation to cool as we move through 2022.”