- Inflation reached its highest rate in nearly 30 years in December – and the EY ITEM Club expects CPI inflation to peak at just over 6% in April. But this will be heavily influenced by the scale of the rise in the energy price cap and any government action to mitigate cost of living pressures. Risks lie to the upside.
- The EY ITEM Club still expects inflation to slow significantly in H2 2022 and into 2023. Upward pressures from global goods and commodity prices should fade, while there remains little evidence of an escalation in domestic underlying pressures.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“CPI inflation accelerated to 5.4% in December – from 5.1% in November – to reach the highest rate since March 1992. Though the contribution from petrol prices edged down – pump prices were flat between November and December in 2021, but rose between those months a year earlier – this was more than offset by the impact of higher food prices, and another pickup in core inflation.
“Inflation is likely to remain close to current rates in Q1 2022 before rising again in April, when the next rise in the energy price cap and the restoration of the VAT rate to 20% for the hospitality sector affect the index. How high the CPI rate goes will depend on the extent to which the price cap is increased, and on any policies introduced by the Government to try to mitigate the impact on households.
“The EY ITEM Club thinks CPI inflation is likely to move to just over 6%, with the risks skewed towards a higher outturn. It then expects inflation to slow in H2 2022 and 2023. Strong base effects will come into play, while oil and natural gas prices could fall back. Furthermore, as the Omicron wave fades, the rotation of consumer spending back towards services and away from goods should help to calm pressures on global goods prices. Given there is still little evidence of any escalation in domestic underlying inflationary pressures, the EY ITEM Club thinks inflation could fall below the 2% target during 2023.”