- Price pressures have intensified over the past month and though the rise in CPI inflation temporarily paused in September, the EY ITEM Club now expects the peak to be significantly above the 3.5% predicted in its last forecast.
- Nevertheless, the EY ITEM Club believes the pickup is likely to prove transitory and the Bank of England should not raise interest rates soon.
- The rise in inflation will recommence in October due to the 12% increase in the energy price cap. Petrol and global goods prices are set to rise further, while there is likely to be another large increase in the energy price cap next April.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“CPI inflation edged down from 3.2% in August to 3.1% in September. Base effects were the main reason for the pause in the upward trend, with last September having seen the core measure of inflation rise following the end of the Eat Out to Help Out scheme.
“The EY ITEM Club expects inflation to pick up again in October once the 12% increase in the energy price cap takes effect. A number of factors are then likely to push CPI inflation up to over 4% by the end of the year and keep it at a high rate – by the standards of recent years – through the first half of 2022. The recent increases in the oil price will continue to feed through to petrol prices, while component shortages and supply-chain challenges will continue to put upward pressure on global goods prices. And, as things stand, the increase in natural gas prices is set to cause a 20%+ rise in the energy price cap next April.
“But each of these factors is likely to prove temporary and it remains hard to find evidence for why inflation should remain high over the medium term. Indeed, the prospect of oil and natural gas prices falling back next year, as demand and supply rebalance, and large base effects caused by this winter’s increase, mean that inflation is likely to fall significantly in 2023. While the signs are pointing to Bank Rate rising sooner than the late 2022 date the EY ITEM Club previously expected, any increase in the near future might be a policy mistake.”