Press release

19 Oct 2022 London, GB

Fiscal U-turns mean a more uncertain outlook for inflation – EY ITEM Club comments

Martin Beck, Chief Economic Advisor to EY ITEM Club, provides comments on the latest public finance news.

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  • The Consumer Price Index (CPI) rose marginally in September as a fall in fuel prices was largely offset by the rising cost of food. A large rise in the energy price cap in October means the EY ITEM Club thinks that inflation is likely to peak this month, although it probably won't be much higher than the current rate.
  • However, the long-term outlook for inflation has become more uncertain following the fiscal U-turns announced in recent days. On the one hand, a much tighter fiscal stance points to lower inflation in the medium term. On the other, the curtailment of the cap on energy bills could push inflation up significantly next spring.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “Consumer Price Index inflation rose to 10.1% in September from 9.9% in August, a little above both the consensus and Bank of England forecast of 10%. A rise in food prices (+1.1% month-on-month) made the largest contribution to September's index, as increases in agricultural prices continued to affect the headline reading. However, this was partly neutralised by declining fuel prices, which fell by 4% in September.

“With energy prices set to rise further in October and upward pressure on the cost of imports from the weak pound, the rise in inflation in September will add to the list of concerns for households and the Monetary Policy Committee. The EY ITEM Club expects the CPI measure to peak at around 11% in October, followed by a more gradual decline than previously anticipated, caused by the recent fall in sterling.

“However, the outlook for inflation beyond the next few months has become more uncertain following the recent fiscal U-turns made by the new Chancellor. On the one hand, a tighter fiscal policy will weigh on demand, so should bear down on inflation in the medium term – as well as putting less pressure on the MPC to raise interest rates aggressively. But on the other, the decision to end the Energy Price Guarantee next April, rather than October 2024, could lead to inflation rising next spring.”