UK inflation rises sharply

Date : 13 April 2022

ONS has released its latest inflation data up to March 2022. Overall, this is the highest year-on-year inflation level for 30 years, recording 7.0% on the CPI index and 6.2% on the CPIH index. The older RPI measure inflation reached 9.0% up from 8.2% to February 2022.

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

As shown in Figure 1, price rises in ‘food and drink’ have continued to accelerate, from -0.6% in August 2021 to 5.9% in March 2022. At the same time last year ‘food and drink’ inflation was -1.4%.

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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, energy price shocks are now being felt across the wider economy.

Note that ‘food, retail’, shown as the yellow bar now makes a considerable contribution to inflation effects. Prices across food retail are rising especially fast, up from 5.3% in February to 6.2% in March. 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 food production margins, as illustrated in the chart below. Input prices for food producers are continuing to rise, up 7.7% since August. These rises will continue to feed into retail prices in the coming months.

Click chart to enlarge

IGD opinion

These inflation figures, round off a week of gloomy economic data. The issue for households, businesses and policy makers is that the worst is yet to come.

The OBR forecast that RPI inflation will reach 10.5% next month, peaking at nearly 11% in Q4 2022. Inflation on a CPI basis is expected average 7.4% over 2022.

Persistent inflation is having material impacts on household ‘real’ incomes. Yesterday, ONS revealed that workers are 2.6% worse off than a year ago.

The above figure includes bonus payments, generally paid to higher earners. Stripping out the impact of bonus payments, workers are 3.8% worse off on an RPI basis than a year ago. This level of fall in real incomes is substantial and raises material welfare concerns for the most vulnerable households.

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