- Although inflation continued to accelerate in February, the latest pickup is likely to pale in comparison to the pace of price rises over the next couple of months. A fully updated EY ITEM Club forecast is due to be published shortly.
- The Chancellor may try to mitigate the upward pressures when he presents his Spring Statement later today. But measures such as a temporary cut to fuel duty would not fundamentally alter the outlook, which remains heavily dependent on geopolitical factors and global commodity markets.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“CPI inflation accelerated to 6.2% in February from 5.5% in January, the highest rate since March 1992. February’s rise was largely due to stronger core inflation, reflecting several factors. The impact of rising global goods prices continued to feed through. There were upward pressures from the volatile clothing and footwear and recreation and culture sectors, the former reflecting unusual seasonal pricing patterns. And there were strong base effects, after a soft reading last February when the economy was in lockdown.
“Inflation will rise significantly over the next two months. Petrol prices have increased in recent weeks in reaction to the rise in oil prices. Last week, pump prices were almost 15% above the February average. Inflation will then rise up again in April, as the 54% rise in the energy price cap takes effect, and the VAT rate for the hospitality sector returns to 20%. It's possible that the Chancellor will use today’s Spring Statement to mitigate these upward pressures, perhaps via a temporary cut in fuel duty. But it’s unlikely that any fiscal intervention will stop CPI inflation rising to well over 8% in April.
“What happens further out will be heavily influenced by the geopolitical situation and its impact on commodity prices. Though there has been more encouraging news on wholesale gas prices in recent days, a further increase in the energy price cap in October still looks likely, while petrol prices are likely to be slow to fall back. As such, the EY ITEM Club expects CPI inflation to average close to 7% this year, generating the biggest squeeze on household finances for more than a decade.”