Surprise inflation fall likely to prove blip ahead of winter misery

Prices dipped last month due to the unwinding of the Eat Out to Help Out scheme, but the fall is likely to prove short-lived amid growing inflationary pressures, economists have warned.

Wednesday, 20th October 2021, 7:50 am
Updated Wednesday, 20th October 2021, 7:59 am

The Office for National Statistics (ONS) said the consumer prices index (CPI) measure of inflation eased to 3.1 per cent in September from 3.2 per cent in August.

However, the figure remains well above the Bank of England's target rate of 2 per cent and many experts fear inflation could spiral well beyond 4 per cent in the coming months.

Mike Hardie, head of prices at the ONS, said: "Annual inflation fell back a little in September due to the unwinding effect of last year's Eat Out to Help Out, which was a factor in pushing up the rate in August.

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Households have been facing pressure from increased prices on many goods, while energy costs and petrol prices have also been on the rise. There are also hefty tax rises round the corner. Picture: Rui Vieira/PA

"However, this was partially offset by most other categories, including price rises for furniture and household goods, and food prices falling more slowly than this time last year.

"The costs of goods produced by factories rose again, with metals and machinery showing a notable price rise.

"Road freight costs for UK businesses also continued to rise across the summer."

Average petrol prices stood at 134.9p per litre in September 2021, compared with 113.3p per litre a year earlier, as fuel provided an upward pressure on inflation, the ONS said. Petrol prices have risen even higher in recent weeks.

Annabelle Williams, personal finance expert at Nutmeg, the online investment management service, said: “Inflation has fallen slightly - welcome news for households feeling the burn from higher energy costs and the fuel shortage.

“This is a sign that inflation could potentially ease in the coming months, but there are still pressures that are keeping inflation high and could push it up further still.

“The cost of transport and housing remains high whilst restaurants, hospitality and retail are among the industries which have struggled amid the shortage of HGV drivers and petrol, rising energy costs and big jumps in the prices of some raw ingredients – all of which has left these industries with shortages and supply chain issues.”

Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said: “September’s dip in inflation reflects temporary data distortions rather than the reality on the ground.

“A renewed inflationary surge is expected in the coming months with the increase in the energy price cap, partial reversal of the VAT reductions for hospitality & tourism and persistent supply chain disruption. This is likely to push inflation above 4 per cent by the end of 2021.

“Rising inflation could disrupt the UK's economic recovery by eroding consumers’ spending power and squeezing firms profit margins and ability to invest.

“While inflation is uncomfortably high, the Bank of England must hold its nerve on interest rates. Raising rates at a time of escalating cost pressures and looming tax rises would severely undermine an already fragile recovery.”

Thomas Pugh, economist at RSM UK, said: “Inflation paused for breath in September, but this won’t last long. Surging energy prices and supply-chain disruptions will push inflation to a peak of 5 per cent by April 2022.”

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