Friday, September 17, 2021

Inflation records the steepest rise in history

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Inflation in the UK last month jumped faster than at any time since the Bank of England gained independence to set its interest rate, rising 1.2 percentage points to 3.2 per cent.

With prices climbing 0.7 per cent in the month of August alone, the main cause of the rise reflected sharp monthly increases in food, transport, furniture and restaurant prices as the government relaxed coronavirus restrictions. Prices in each of these categories rose more than 1 per cent in the month compared with July.

The unexpected surge will undermine the central bank’s view that price rises are manageable and temporary with more expected this autumn in a serious squeeze in living standards.

Eating and drinking out cost more last month in comparison with August last year, when the Eat Out to Help Out Scheme was running and diners got a state-backed 50% discount on meals up to £10 each on Mondays, Tuesdays and Wednesdays.

Jonathan Athow, deputy national statistician at the ONS, said: “August saw the largest rise in annual inflation month-on-month since the series was introduced almost a quarter of a century ago.

At the same time, business owners in the hospitality and tourism sectors received a VAT discount, designed to help some of the industries worst hit by the pandemic.

“However, much of this is likely to be temporary, as last year, restaurant and cafe prices fell substantially due to the Eat Out to Help Out scheme, while this year, prices rose.”

In August this year, transport costs also increased.

Average petrol prices stood at 134.6 pence a litre, compared with 113.1 pence a litre a year earlier, when travel was reduced under lockdown restrictions. Used car prices were also partly to blame for price rises – they increased by 4.9% in just one month. Since April, they have gone up by more than 18% amid a shortage of new models.

Ruth Gregory, senior UK economist at Capital Economics, told BBC Radio 4’s Today Programme that price rises seen in August were “almost unavoidable” because of the discounts available in 2020. “Inflation, which is a year-on-year comparison, was always going to look strong compared to last year,” she said.

“Some of that rise reflected genuine factors too. In particular, we are now seeing the effects of higher global shipping costs and shortages of staff driving up food price inflation.” She also expects, however, that the cost of living could continue to increase rapidly, with inflation exceeding 4% by November.

The latest official figures may fuel debate about whether interest rates need to go up. Capital Economics points out that inflation is likely to fall back almost as sharply next year and that the Bank of England’s Monetary Policy Committee is not expected to raise interest rates until 2023.

The central bank’s deputy governor, Ben Broadbent, insisted in July that it would not stop its efforts to boost the economy, despite the forecast of higher costs. “While we know is going to go further over the next few months, I’m not convinced that the current inflation in retail goods prices should in and of itself mean higher inflation 18 to 24 months ahead, the horizon more relevant for monetary policy,” he said.

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