UK inflation continues to climb higher

Inflationary pressure continues to be broad-based with most sectors showing growth.

As shown in Figure 1, price rises in ‘food and drink’ have accelerated dramatically, from -0.6% in August to 4.4% in January. At the same time last year ‘food and drink’ inflation was -0.7%.

Figure 1

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Figure 2 shows estimated contributions to RPI - here, we have used RPI because it gives broader coverage of household costs than CPI. Domestic energy continues to contribute a large proportion of price change, however, given the broad-based nature of this inflationary pressure, it would suggest that these energy price shocks are now being felt across the wider economy.

Note that ‘food and drink’, shown in the yellow bar makes a noticeable contribution to inflation effects – we would expect this to have significant impacts on shoppers.

Figure 2

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This inflation is being driven by supply-side factors, especially energy prices. This is feeding into the food production margins, as illustrated in the chart below. Input prices for food producers are continuing to rise, up 5.5% since August. These rises will continue to feed into retail prices in the coming months.

Figure 3

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IGD opinion

The January inflation data release is a continuation of the trend seen in December with numbers up 0.1% vs December 2021. This however, is the calm before the storm, the Bank of England expects inflation to peak at 7.25% in April, once the energy price cap is lifted by 54%.

Current gas future curves and oil prices suggest shoppers will have to live with expensive energy for the foreseeable future. These increased costs will hit the most vulnerable households, who proportionately spend considerably more than average households on food, drink, and energy.

This is covered in more detail in the latest free Viewpoint report – Will inflation kill the recovery.