New data shows surprisingly strong inflation in February 2023

Data from ONS shows that “all items” annual inflation rose from +10.1% in January to +10.4% by the CPI method or from +13.4% to +13.8% using the more comprehensive RPI method.

This surprised some key forecasters – especially OBR – especially since falling energy prices and mathematical effects were expected to lead inflation downwards.

Food and drink – sold at both retail and hospitality – were key contributors to the inflation increase. Most food items saw strong price change, reflecting ongoing cost change in the supply chain.

Vegetable prices rose especially fast, due to supply issues in the Mediterranean. Persistent high food inflation is not out-of-line with IGD forecasts, however.

It should be noted that methodological changes may also have had some effect. February is the month that ONS changes the sample items and the weighting used to create inflation data.

In 2023, food has been given greater prominence, meaning that changes in the food market have more powerful influence on the “all items” measure than before.

Looking ahead, IGD expects that inflation will resume its downward trajectory, assuming that there are no further economic shocks. However, there are some strategic risks, primarily:

• Wage change, which may begin to drive inflation harder (a “wage-price spiral”) in some categories
• Weather and other natural factors which may restrict food availability in 2023, pushing prices up

Surprisingly high inflation data has presented policy makers with some difficult decisions, especially at the Bank of England.

Raising or holding base rates would help to choke-off inflation, but easing rates would help to support the financial sector, which has seen some institutions struggling in recent weeks.

In the event, the Bank’s Monetary Policy Committee (MPC) elected to raise base interest rates in March 2023, changing from +4.00% to +4.25%.