UK inflation soars to 3.2% in fastest monthly rise on record

August consumer price data given 'a significant shove' by Rishi Sunak's Eat Out to Help Out scheme last year

Rishi Sunak's Eat Out To Help Out dining discount scheme helped to boost the economy last summer, encouraging consumers to spend after lockdown. AFP

UK inflation rose to its highest level in more than nine years in August, as restaurant and cafe prices raced higher following last summer’s discounts under the government's Eat Out to Help Out scheme.

Consumer price inflation surged to 3.2 per cent in the 12 months to August, the highest level since March 2012, after falling to the Bank of England's 2 per cent target in July, according to the Office for National Statistics.

Jonathan Athow, deputy national statistician for economic statistics at the ONS, said the increase - the sharpest since records began in 1997 - was largely due to the discounts seen across the hospitality sector last August under Chancellor Rishi Sunak's Eat Out to Help Out scheme, which was aimed at boosting consumer spending and confidence after lockdown.

“Food and non-alcoholic drink prices rose by more than last year, which also helped push up the rate,” Mr Athow said.

“Rises in computer games prices, which are often erratic, also added upwards pressure.”

The ONS cautioned against reading too much into August’s price increases, which it described as “temporary".

In August last year, the government offered diners a discount of up to £10 ($13.82) per head on meals from Mondays to Wednesdays, to kick-start the economy and encourage people to spend money again after the pandemic lockdown.

Restaurant prices represented more than half of the 1.2 per cent rise in headline inflation last month.

At the same time, business owners in the tourism and hospitality sectors received a VAT discount, designed to boost the worst hit industries during the pandemic.

However, the sharper-than-expected rise in inflation will be noticed by BoE policymakers who are deciding whether to call an early end to the stimulus plan launched at the height of the Covid-19 pandemic last year.

“Higher inflation will inevitably raise questions for the Bank of England on the timing of tightening monetary policy and interest rate hikes to contain inflationary risks further down the line,” said Yael Selfin, chief economist at KPMG UK.

Fuel prices were also responsible for the August surge in prices, with average petrol prices at 134.6 pence per litre compared with 113.1 pence a litre a year ago, when travel was drastically reduced amid the Covid-induced work-from-home trend.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said inflation took a “breathtaking leap” in August, after being given a “significant shove” by the discounts available last year.

“However, much of this enormous jump is powered by the same alarming imbalance between supply and demand that has seen yawning gaps open up on the supermarket shelves. It spells trouble for shoppers, savers and the broader economy,” Ms Coles said.

While some of the factors pushing up inflation are “temporary”, Ms Coles said other changes such as higher food and petrol prices are set to stick around.

“Used car prices also drove some of the change. They were up 4.9 per cent in a month, and up 18.4 per cent since April this year,” said Ms Coles.

“Demand for cars increased as we looked for alternatives to public transport in the wake of the pandemic, and with a shortage of computer chips causing long waiting lists for new cars, we piled into the second-hand market.”

The BoE expects inflation to hit 4 per cent towards the end of 2021 and then drop, as the impact of the first lockdown and supply bottlenecks drop out of the figures.

However, with warnings of prices rising, and supply chains creaking, there is a risk some of this inflation is here to stay, Ms Coles said.

“There’s also the chance of possible wage rises as vacancies hit record highs, and when prices and wages feed into one another, the only way is up for inflation,” she said.