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Scaling back of energy support risks renewed inflation surge

Author: ICAEW Insights

Published: 19 Oct 2022

The latest official estimate from the Office for National Statistics reveals that UK inflation accelerated to 10.1% in September as food prices soar.

The inflation figures released on Wednesday 19 October 2022 by the Office for National Statistics (ONS) reported that the Consumer Prices Index (CPI) rose by 10.1% in the 12 months to September 2022, the highest rate since July and up from 9.9% in August. Core inflation – which strips out food, energy, alcohol and tobacco – stood at 6.5% last month in the year to September, up from 6.3% in the year to August.

Rising food prices made the largest upward contribution to the change in the CPI annual inflation rates between August and September 2022. The continued fall in the price of motor fuels made the largest – partially offsetting – downward contribution to the change in the headline rate.

Responding to the latest UK inflation figures, Suren Thiru, Economics Director for ICAEW, said the return to double-digit inflation underscores the devastating financial squeeze facing households and businesses. He added: “September’s uptick should be followed by a notable leap in inflation in October as energy-bill increases push inflation to around 11%, albeit lower than it would have been without the Energy Price Guarantee.

“The Chancellor’s decision to scale back energy support from April 2023 risks fuelling a renewed inflationary spike, which may deepen the recession by further eroding incomes and forcing more aggressive interest-rate rises.”

Food and non-alcoholic beverage prices rose by 14.6% in the 12 months to September 2022, up from 13.1% in August. The annual rate of inflation for this category has continued to rise for the last 14 consecutive months, from negative 0.6% in July 2021. The current rate is estimated to be the highest since April 1980. The largest upward effects came from bread and cereals, meat products, and milk, cheese and eggs, where prices rose between August and September 2022, but fell between the same two months in 2021.

The annual inflation rate for transport was 10.9% in September 2022, down for a third month in a row from a peak of 15.2% in June 2022. Fuel-price changes are the main driver behind the overall movements within transport. Fuel prices increased by 26.5% in the year to September 2022, down from 32.1% in August.

Inflated food prices were a dominant factor for the CPI increase

On a monthly basis, UK CPI rose by 0.5% in September 2022, compared with a rise of 0.3% in September 2021. Food prices made the largest upward contribution to the monthly rate in September.

ONS data suggests that the cost of doing business crisis eased slightly in August. Producer-input prices rose by 20.5% in the year to August 2022, down from 22.6% in the year to July 2022. Producer-output (factory gate) prices rose by 16.1% in the year to August 2022, down from 17.1% in the year to July 2022. Crude oil and petroleum products provided the largest downward contributions to the change in the annual rates of input and output inflation, respectively. On a monthly basis, input prices decreased by 1.2% and output prices fell by 0.1% in August 2022; this is the first time the monthly rates have been negative since August 2020 and September 2020, respectively.

ONS data reveals supply-chain price pressures are easing. Factory-gate prices rose by 15.9% in the year to September 2022, down from 16.4% in the year to August. Producer-input prices increased 20% in the year to September, down from 20.9% in the year to Aug, the third consecutive monthly fall. However, services-producer prices rose by 6.6% in the year to Q3 2022, the highest rise since records began in Q1 1999 and up from 5.4% in the year to Q2 2022.

On the impact of September’s CPI inflation rate on the bills firms will face in the next financial year, Suren added that many companies are facing “eye-watering tax rises” next April as business rates rise with September’s CPI inflation, aggravating already diminished cash flows. “This is particularly acute for those in retail, leisure and hospitality, whose temporary 50% rates relief expires in the same month,” he said.

For further information, read the ONS Consumer price inflation and Producer prices

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