UK inflation posts record jump to hit 9-year peak in August

September 15, 2021

By Andy Bruce and David Milliken

LONDON (Reuters) -Britain’s inflation rate hit its highest in almost a decade last month after a record jump that was largely fuelled by a rebound in restaurant prices which were artificially pushed down a year ago by government subsidies.

Consumer prices in August rose by 3.2% year-on-year, the highest annual inflation rate since March 2012 and up from 2.0% in July, the Office for National Statistics said.

Statisticians said the one-off effect of the government’s “Eat Out to Help Out” scheme, which briefly offered diners a discount on meals to help a sector hit by the pandemic, would vanish from next month’s data.

But the Bank of England is still braced later this year for inflation to hit 4% due to higher energy prices and pandemic bottlenecks which it expects will fade over the course of 2022.

August’s 1.2 percentage point rise in the annual rate of inflation marked the sharpest increase since detailed records started in 1997. None of the 37 economists polled by Reuters had expected such a strong reading, with the median forecast instead pointing to consumer price inflation at 2.9%.

“Much of this was driven by the heavy discounts offered under the Eat Out to Help Out Scheme last summer. That said, there are also signs that inflationary pressures are increasingly broad based across many sectors of the economy,” said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.

The ONS also pointed to anecdotal evidence that shortages of supply chain staff and rising shipping costs fed through into food prices last month, which recorded their biggest monthly rise for any August since 2008.

Higher oil prices, global shipping problems and shortages of components for some goods such as motor vehicles have contributed to rising inflation in many countries including Britain.

Last month euro zone inflation hit a 10-year high of 3%, although data on Tuesday showed U.S. underlying consumer prices increased at their slowest pace in six months, suggesting inflation there may have peaked.

British government bond yields rose after Wednesday’s data as investors nudged up their expectations for BoE interest rate increases next year.

A Reuters poll of economists last week suggested the BoE will raise borrowing costs by end-2022, earlier than previously thought, while markets price in a first increase by May and a further rise in December. [ECILT/GB]

BASE EFFECT

In August 2020 the government offered diners a 50% discount of up to 10 pounds ($14) per head on meals to kick-start the economy. A year later, the absence of these discounts meant restaurant prices comprised more than half of the 1.2 percentage point rise in headline inflation last month.

As with July’s unexpectedly weak reading, economists said August’s surge in inflation was unlikely to unduly worry BoE policymakers who are weighing an early end to stimulus launched at the height of the COVID-19 pandemic.

“(These) effects are largely transitory and there is little policy makers can do to stem this cost of living crunch,” said Jack Leslie, senior economist at the Resolution Foundation think tank.

However, the central bank faces a trickier task in judging whether labour shortages may create longer term pressures. Last month half of the BoE’s policymakers judged that some basic pre-conditions for a rate rise had been met, although none thought there were sufficient grounds to tighten policy yet.

British producer price data on Wednesday showed more persistent price pressures in the pipeline. Both manufacturers’ raw material costs and the prices they charged to customers rose at the fastest rate since late 2011, with oil prices soaring 50% over the past year.

Separate ONS data showed British house prices in July were 8.0% higher than a year before, a much smaller increase than the 13.1% rise in June, the last month for buyers to take full advantage of a temporary tax break on property purchases.

($1 = 0.7235 pounds)

(Editing by Kate Holton and Angus MacSwan)

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