UK inflation eased unexpectedly in September as prices in the hospitality sector were skewed by base effects from last year's government-backed “eat out to help out” scheme.
Data from the Office for National Statistics (ONS) published on Wednesday showed that the headline consumer price index (CPI) dipped to an annual rate of 3.1% in September from 3.2% in August as the monthly rate increased by just 0.3%, following a 0.4% surge in the previous month.
The restaurant effect
The ONS said that the most significant downward pressure on inflation in September came from the hospitality sector – particularly from prices in restaurants and cafes.
Prices in this sector were skewed upwards last month by base effects resulting from the government's “eat out to help out” scheme in August 2020, which saw participating businesses offering up to 50% discounts to encourage diners back into public eating venues after the first lockdown was lifted.
Thus, once the scheme ended in September 2020, prices in the hospitality sector rose sharply as they were no longer discounted. Indeed, Wednesday's data showed a 0.3% rise in restaurant and cafe prices last month, compared with a 4.1% month-on-month rise in September 2020.
Energy prices rise
The transport section along with housing and household services continued to be the biggest contributors to inflation in September. The average petrol price stood at 134.9p a litre in September – its highest since September 2013 – while household fuel bills rose, despite the government cap on utility company price rises remaining in place until the end of the month.
Analysts appeared in no doubt that the September dip in inflation was just a blip in the data and that the CPI would see further increases in the months to come.
Indeed, Wednesday's data showed that producer prices continued to rise in September. Producer input costs rose at an annual rate of 11.4%, up from 11.2% in the previous month, while output prices rose at 6.7%, up from 6% in August.
Rises to come
“This feels a bit like the lull before the storm as the 12% rise in utility prices on 1 October will probably lift CPI inflation to around 3.8% in October,” said Paul Dales, chief UK economist at Capital Economics.
The market reaction appeared unlikely to deter the Bank of England from raising the UK base rate at least once this year, however, given the breadth of hawkish commentary in recent days from members of the Bank’s Monetary Policy Committee (MPC).
“Our base case remains that the MPC will increase the bank rate just once, to 0.25%, in the next 12 months,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics. But he also believed that there are “enough sane heads remain on the MPC to place weight also on incoming GDP [gross domestic product] data, which we think will show that the economic recovery has petered out.”