Why September’s dip in UK inflation may be a false dawn

Just when everyone was preparing for a stratospheric rise in September’s consumer prices index from August’s 3.2%, the Office for National Statistics said it fell to 3.1%.

Anyone concerned about rising prices could be forgiven for thinking that the momentum building in recent months had slipped a gear and forecasts of inflation running away to 4% or even 5% next spring could joyfully be put in the bin.

Not so fast. The coronavirus pandemic has wreaked havoc on most official data and the inflation figures are among the worst affected.

Lockdowns that closed most shops and government subsidies that propped up household spending power are among the many distorting effects of Covid-19 affecting prices.

The chancellor’s £850m eat out to help out scheme that offered 50% off meals up to £10 in August last year to lure consumers back to the high street is the latest to send the figures in an unexpected direction.

Rishi Sunak’s handout for bars and restaurants, which many health experts believe was a super-spreader event that contributed to the surge in the virus last autumn, was not only financially costly, it also allowed for a reduction in prices in August.

Subsequent price increases in September 2020 meant the cost of eating out increased at a slower rate relative to the same month this year.

Next month, when we get the October inflation figure, the previous pattern of rising prices looks likely to resume, with the added ingredient of a petrol shortage panic that drove the cost of fuel at the pumps to a high point for the year.

The Bank of England has predicted inflation will rise above 4% before the end of the year, and many of its officials fear it will touch 5% in the spring when the energy price cap set by the regulator, Ofgem, is revised upwards again to take account of a steep increase in gas prices.

Fear is the word because there is a body of opinion in Threadneedle Street that wants to keep consumer expectations of inflation’s longer-term trend in check. Or more particularly, workers’ expectations, so they cannot demand the kind of wage increases that would transform a temporary jump in inflation into a longer-term trend.

At the moment, there seems little sign of any increases in wages outside the much-publicised transport sector and, most acutely, businesses that need HGV drivers.

Worker shortages in other sectors continue because employers either cannot or will not pay a higher price for salaried staff. That was the case in 2011 when inflation reached 5% and there is nothing in the employment and wage figures to say any different today.

That might sound like a strange interpretation of the wage figures when they show annual increases topping 8%. However, this is yet another set of data upended by the pandemic.

The ONS says wages are increasing at only 3.5-4% when one-off effects are stripped out. Wage settlements reported by large and medium-sized firms are even lower and consistent with pre-pandemic levels at 2%.

It seems unlikely that the Bank of England’s monetary policy committee will ignore this evidence when it meets next on 4 November to set interest rates.

Maybe some of its nine members will focus on the 6.7% increase in producer prices that would feed through into retail prices and inflation should retailers believe consumers would carry on buying.

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With wage rises remaining subdued, there is no likelihood of consumers being able to afford an inflationary surge in prices any time soon. That means firms must absorb the increases in costs, taking a hit to profits rather than driving inflation up even more.

Ministers, concerned that the 8% wage inflation figures would give pensioners a large windfall based on the triple lock pledge – which promises an annual increase pegged to whichever is the highest figure out to pay an uplift each year of the higher of inflation, earnings rises or 2.5% – will be among those pleased inflation slipped backwards in September.

Last month’s decision to strip out the wages element of the pensioner promise next year means those in retirement will receive a 3.1% increase, pegged to September’s inflation figure. After a decade of almost unbroken inflation-busting increases, it is a pause that helps the chancellor spend on other things.

Maybe he will choose to put more money behind Boris Johnson’s net zero plan. After Sunak was criticised by green groups and opposition MPs for the meagre sum set aside for tackling the climate emergency, he might do just that in the budget next week.


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