UK inflation made its biggest jump on record in August amid a rise in food and drink prices, reversing a sharp decline a year earlier during the government’s eat out to help out restaurant discount scheme.
The Office for National Statistics (ONS) said the consumer prices index measure of annual inflation rose to 3.2% in August, up from 2% in July and the highest rate since March 2012, as the cost of a meal snapped back from a period of steep discounting a year ago.
The increase in prices surpassed City economists’ forecasts for a rate of 2.9%, and the 1.2 percentage point increase between July and August’s figures was the largest since records began in January 1997.
The ONS said the rise was likely to be temporary as the reading had been heavily distorted by Rishi Sunak’s discount scheme, which offered customers half-price food and drink from Monday to Wednesday in August 2020. Inflation is calculated based on the annual change in price for a basket of goods and services.
The statistics agency said stripping out the impact of the scheme, which was designed to stimulate economic activity after the first coronavirus lockdown, would have reduced the inflation rate by 0.4 percentage points.
However, there were also sharp increases for a range of other goods and services, including food and drink in supermarkets, petrol prices, secondhand cars and computer games and CDs.
It comes as shortages of workers and supplies put pressure on Britain’s economic recovery from lockdown and risks pushing up the cost of living for consumers as businesses struggle to digest higher costs.
Reflecting the challenge for firms, manufacturers’ input price inflation rose from 10.4% in July to 11% in August, the highest level since 2011, with soaring demand and supply disruption worldwide pushing up the cost of wood and steel. Factory gate prices rose from 5.1% to 5.9%, also the highest in a decade.
Analysts said mounting production costs would take time to hit consumers, and would depend on whether firms pass on higher prices or choose to sacrifice profit margins to maintain sales volumes.
Many economists believe the jump in inflation will prove temporary as distortions caused by a slump in prices last year fade, and as pressure on global supply chains gradually abates.
However, others warn inflation could remain persistently high as the coronavirus Delta variant and continued pandemic restrictions, as well as Brexit, maintain the pressure on supply networks.
The jump will force Andrew Bailey, the governor of the Bank of England, to write to the chancellor to explain why CPI has moved more than one percentage point away from Threadneedle Street’s 2% target and detail what action the rate-setting monetary policy committee plans to take.
Bailey was last forced to write a letter to Sunak as recently as May when the inflation reading for February was only 0.4%.
The ONS said food and non-alcoholic drinks prices rose by 1.1% on the month in August, the highest rate of growth since 2008, reflecting the impact from supply chain disruption amid shortages of lorry drivers and higher global freight costs. Food and drink prices in the shops had been falling for much of the past year.
Household energy bills are poised for a sharp rise this winter as wholesale gas and electricity costs soar to record levels, while a temporary cut in VAT for the hospitality sector will be unwound at the end of this month.
Labour and the unions said the figures showed families would be hit hard by the government’s plans to freeze public sector wages, cut universal credit, and raise national insurance.
“The cost of food, of rent, of basic day-to-day living is the highest it’s been for 10 years,” said the GMB trade union’s Rehana Azam. “Yet the government persists with pushing forward a real-terms pay cut for public sector workers. Their cruel agenda is taking food from the mouths of our carers, our NHS workers, of school staff and our council workers.”
Bridget Phillipson, the shadow chief secretary to the Treasury, said: “People are already feeling the effects of inflation, in their weekly shop and at the petrol pump.”