UK inflation hits highest figure in almost a decade as food prices rise – business live | Business

The leap in CPI inflation from 2.0% in July to a nine-year high of 3.2% in August is the first step in a rise that may take inflation to 4.5% by November. But as inflation will fall back almost as sharply next year, we don’t think the MPC will raise interest rates until 2023.

About 0.9ppts of the rise in CPI inflation in August was due to base effects linked to the sharp fall in consumer prices in August 2020, most of which was driven by the Eat Out to Help Out restaurant discount scheme.

But 0.3ppts of the rise was due to a strengthening in underlying price pressures. The 5.9% m/m rise in hotel prices in August was much stronger than the 0.6% m/m decline you usually get at this time of year, which pushed up its inflation rate from 5.7% to 11.6%. And the rise in food inflation from -0.6% to +0.3% is probably due to the pass-through of higher shipping and commodity costs as well as some product shortages.

What’s more, a further rise in inflation to at least 4.2% already seems in the bag. The scheduled rise in utility prices will add 0.7ppts from October and base effects will mean clothing inflation adds 0.3ppts in November. We’re also expecting a further pass-through of costs to mean food inflation adds at least another 0.3ppts. As such, inflation may be 4.5% by November.

Inflation will fall sharply next year as a lot of these upward influences unwind. By the end of 2022, it may be below 2.0% again. That, and the recent weakening in the near-term activity outlook, explains why we think the MPC won’t raise interest rates until 2023. But the next few months of soaring inflation will be an uncomfortable period for the MPC.

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