Inflation is likely to have peaked in October – EY ITEM Club comments

• Inflation rose in October, with the Consumer Price Index (CPI) reaching 11.1% year-on-year, the highest rate in over 40 years. The rise in inflation was primarily driven by a large increase in energy prices, as consumers transitioned from the Energy Price Cap to the higher Energy Price Guarantee. The EY ITEM Club expects this to be the peak for inflation, with a subsequent decline over 2023. 

• With inflation set to fall back, a significant fiscal consolidation likely to be announced in the Autumn Statement, and the economy entering recession, the EY ITEM Club expects this will affect the Monetary Policy Committee’s appetite for raising interest rates as high as markets are predicting. The EY ITEM Club still thinks the Bank Rate will peak at no more than 4% by early-2023.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “Consumer Price Index inflation rose to 11.1% in October, up from 10.1% in September and reaching its highest rate in over 40 years. An increase in energy prices accounted for almost all of October's increase (+0.93ppts), as the transition from the Energy Price Cap to the Energy Price Guarantee (EPG) meant the typical annual household energy bill rose from £1,971 to £2,500 in October. There was also another upside surprise from food prices, although with the rise in energy bills already baked in, overall inflation was only a touch above forecasters’ expectations. 

“However, the EY ITEM Club thinks inflation has now peaked. The prospect of changes to the EPG – due to be announced in tomorrow's Autumn Statement – means that it is hard to forecast the precise path of inflation over the next year. But, even in the unlikely event that the EPG were to be abandoned entirely, the contribution of energy prices would still fall back next year as large base effects come into play. Falling commodity prices suggest that food price inflation should also be close to its peak, while weaker activity should begin to ease capacity constraints and cool core inflation.

“Given a likely peak in inflation, the prospect of the Government announcing a large fiscal consolidation package, and that the economy appears headed for recession, the EY ITEM Club doesn’t expect the Monetary Policy Committee to raise rates as far as markets are currently anticipating. Bank Rate is forecast to peak at 4% in early-2023, but the risks to this prediction are now pivoting to the downside.”