A short sharp inflation shock - hopefully

The prices of used cars are rising due to the impact of the pandemic and the biggest driver of inflation was prices at restaurants and hotels, ITV News Business Editor Joel Hills reports

The headline rate of inflation looks alarming. Prices in August were 3.2% higher than in the same month last year. CPI inflation surged up from 2.0% in July, carried higher by hotel and restaurant bills and the prices of computer games, used cars and food and drink. The month-on-month leap in the index was the highest the Office of National Statistics (ONS) has recorded since the series was introduced in 1997. But the big picture has been heavily distorted by the chancellor’s Eat Out To Help Out scheme which lead to heavy discounting in pubs, bars and restaurants last August.

The ONS calculates that this scheme alone added 0.4% to the headline rate of CPI inflation.

Eat Out To Help Out was a one-off, the impact of it will fall away next month but inflation is forecast to continue its ascent. In October, energy bills will to rise by as much as 12% when the cap on default tariffs is increased, and the temporary VAT cut rate for the hospitality sector will be partially reversed (it is due to rise from 5% to 12.5%).

There is considerable upward pressure on prices at the moment which is coming from shortages of both labour and products.

Both issues have materialised since the economy unlocked and the Bank of England - whose job it is to ensure that inflation hits a target of 2% - believes that there’s not much it can do about either.

The Bank can’t magic up people to drive lorries or semi-conductors to put in new cars. But it does think that these problems will fade away and that this period of high inflation will prove short-lived. Last month, Andrew Bailey, the governor of the Bank of England, told ITV News that the UK faces a temporary squeeze on our living standards - one that will hurt those on the lowest incomes the most - and that prices are likely to rise at a faster pace than wages for much of next year. The Bank is predicting a shock, sharp inflationary shock. At the moment there’s no evidence to suggest that assumption is wrong but if vacancies remain unfilled and supply bottlenecks persist then things could get more serious.