Difficult Challenges Ahead for MPC with Underlying inflation in the UK Hitting Record High

Main points

• Headline consumer price inflation increased to 10.1 per cent in September 2022 from 9.9 per cent in August. However, NIESR’s measure of underlying inflation which excludes 5 per cent of the highest and lowest price changes, rose to a new series high of 8.3 per cent from 7.8 per cent in August.
• Between August and September, the food and non-alcoholic beverages, and restaurants and hotels sectors were the main drivers of higher headline inflation: these sectors contributed 0.26 percentage points to the change in the headline figure, outweighing the effects of a 0.20 percentage point reduction in transport costs, driven by fuel.
• Our analysis suggests that in September, approximately 28 per cent of goods and services prices changed with almost 17,000 items recording price increases.
• Underlying inflation increased in each of the 12 UK regions in September. Underlying inflation in North England was the highest at 8.90 per cent, while Northern Ireland had the lowest rate at 7.64 per cent in September.
• NIESR expects annual CPI inflation to increase further and peak at between 11 and 12 per cent in January 2023, mainly driven by higher energy prices from October onwards.
• Although the energy price guarantee will support economic activity in the last quarter of this year, shortages in gas supplies, and the new Chancellor’s policy change of revisiting the energy price guarantee in April 2023, increase the risk of higher inflation next year. Higher inflation will continue to drag on economic activity and intensify economic uncertainty.
• There will be greater pressure on the government to withdraw the triple lock on pensions, given that they would otherwise be uprated based on the September inflation number.

“Annual headline CPI inflation increased to 10.1 per cent in September from 9.9 per cent in August. The increase in the latest figure was mainly accounted for by higher prices in food and non-alcoholic beverages which added 0.16 percentage points to the headline figure, followed by restaurants and hotels (+0.10 percentage points).  Likewise, NIESR’s measure of underlying inflation, which excludes extreme price movements, increased to a new series high of 8.3 per cent in September from 7.8 per cent in August. NIESR expects annual CPI inflation to increase further and peak at between 11 and 12 per cent in January 2023, mainly driven by higher energy prices. There will be greater pressure on the government to withdraw the triple lock on pensions, given that they would otherwise be uprated based on the September inflation number.”

Urvish Patel
Associate Economist, Macroeconomic Modelling and Forecasting

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