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August’s dip in inflation a ‘temporary distortion’, says ICAEW

Author: ICAEW Insights

Published: 14 Sep 2022

Latest official estimate revealed that UK inflation slowed to 9.9% in August, amid strong base effects and lower fuel prices.

The Consumer Prices Index (CPI) rose by 9.9% in the 12 months to August 2022, down from 10.1% in July, marking the first time since September 2021 that the headline rate has slowed. Core inflation – which strips out food, energy, alcohol and tobacco – stood at 6.3% in the year to August, up from 6.2% in the year to July.

The easing in August’s inflation rate largely reflected a fall in fuel prices, according to the inflation figures released on Wednesday by the Office for National Statistics (ONS). This was partially offset by upward pressure from price rises for food and non-alcoholic beverages, miscellaneous goods and services, and clothing and footwear. The slowdown was also driven by favourable base effects when compared with August 2021, when inflation jumped from 2.0% to 3.2%.

The annual inflation rate for transport was 12.4% in August, down from 15.1% in July, with motor fuel price changes the main driver. In contrast, food and non-alcoholic beverage prices rose by 13.1% in the 12 months to August 2022, up from 12.7% in July, marking the 13th consecutive monthly rise and bringing it to its highest rate since August 2008. The largest upward pressure on this category came from milk, cheese and eggs.

On a monthly basis, UK CPI rose by 0.5% in August 2022, compared with a rise of 0.7% in August 2021. Food and non-alcoholic beverages made the largest upward contribution to the monthly rate in August, while falling prices for motor fuels resulted in a large offsetting downward contribution. 

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.

Responding to the UK inflation figures for August 2022, Suren Thiru, Economies Director for ICAEW, said: “August’s dip in inflation reflects temporary distortions rather than the painful reality facing people and businesses. While a renewed inflationary wave is expected in the short term, inflation now should peak at around 12% in October once the government support kicks in.

“The energy price guarantee is a double-edged sword for inflation. While it cuts the peak in inflation through keeping energy bills down, it risks keeping inflation higher for longer by stoking consumer demand through universally increasing household incomes. Against this backdrop, an interest rate rise of 75 basis points (bps) next week is a distinct possibility, despite risking accelerating the UK’s slide towards recession.”

Martin Beck, Chief Economic Adviser to the EY ITEM Club, said that on the back of last week’s announcement of government intervention to cap energy bills, the peak in inflation – which had threatened to hit 14-15% in January – is unlikely to be much higher than the current rate.

However, the prospect of a much lower peak for inflation than had been expected is unlikely to prompt a serious change of approach from the Bank of England. “The government’s decision to introduce the energy price guarantee, which will limit typical annual household bills to £2,500, promises to have a significant impact.”

The EY ITEM Club now expects inflation to peak below 11% in October, and the 2023 average is likely to be more than 4% lower than had been predicted before the policy was introduced.

“However, the Monetary Policy Committee appears unlikely to adopt a markedly more dovish approach in response to the good news on inflation,” Beck added. “It would seem the committee is likely to be concerned about the implications of much looser fiscal policy for inflation over the medium term, and the EY ITEM Club expects it to press ahead with a 50bps rate hike at next week’s rescheduled meeting. Indeed, if the committee doesn’t opt for a 50bps hike, it will almost certainly be because its members have opted for a larger increase.”

For further information, read the ONS Consumer price inflationONS Producer prices.

Visit ICAEW’s Inflation hub for a closer look at the impact of inflation on people, businesses, accountancy and the wider economy.

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