The jump in CPI inflation from 2.0% in July to a nine-year high of 3.2% in August is the first step in a rise that could push inflation to 4.5% d ‘by November. But since inflation will fall almost as sharply next year, we don’t expect the MPC to raise interest rates until 2023.
About 0.9 percentage point of the rise in CPI inflation in August was due to base effects related to the sharp drop in consumer prices in August 2020, mainly due to the Eat Out restaurant rebate program to Help Out.
But the 0.3 point increase was due to stronger underlying price pressures. The 5.9% m / m rise in hotel prices in August was much bigger than the 0.6% m / m drop you usually get at this time of year, which brought its inflation rate from 5.7% to 11.6%. And the rise in food inflation from -0.6% to + 0.3% is likely due to the pass-through of rising shipping and raw material costs as well as some product shortages.
What’s more, a further rise in inflation to at least 4.2% already seems in the bag. The expected rise in utility prices will add 0.7 ppt from October and base effects will mean clothing inflation will add 0.3 ppt in November. We also expect a new cost pass-through to mean food inflation adds at least an additional 0.3 ppts. Inflation could therefore reach 4.5% by November.
Inflation will drop sharply next year as many of these upward influences dissipate. By the end of 2022, it could be below 2.0% again. This, and the recent weakening of the near-term outlook for activity, explains why we believe the MPC will not raise interest rates until 2023. But the coming months of soaring inflation will be an uncomfortable time for us. the MPC.