UK inflation reaches highest level in 30 years

Date : 24 March 2022

The ONS has released its latest inflation data up to February 2022. Overall, this is the highest year-on-year inflation level for 30 years, recording 6.2% on the CPI index and 5.5% on the CPIH index. As a comparison, the old RPI measure inflation reached 8.2% up from 7.8% to January 2022.

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

As shown in Figure 1, price rises in ‘food and drink’ have continued to accelerate dramatically, from -0.6% in August 2021 to 5.1% in February 2022. At the same time last year ‘food and drink’ inflation was -0.6%.

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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 now makes up a considerable contribution to inflation effects. Prices across food retail specifically are rising especially fast, up from 4.7% in January to 5.3% in February. This is having an impact on shoppers.

Click chart to enlarge

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 6.9% since August. These rises will continue to feed into retail prices in the coming months.

Click chart to enlarge

IGD opinion

The inflation figures released for February will not come as a shock to most observers. This is simply a continuation of the trend seen since early 2021. The issue households, businesses and policy makers have is that the worst is probably yet to come.

Last week the Bank of England updated its inflationary expectations, following the war in the Ukraine, suggesting that it is likely to hit around 8% in April. This is an increase from its initial expectation of 7.25%. The Bank now also expects this inflationary pressure to be far more persistent, with double digit inflation being forecast for the end of the year.

To control these price rises, the Bank raised interest rates to pre-pandemic levels of 0.75%.

Persistent inflation will have material impacts on the household’s ‘real’ incomes. The UK economy will see the largest cost of living squeeze in several decades over 2022. There are considerable welfare concerns for the most vulnerable households, who proportionately spend substantially more than average households on food, drink, and energy.

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