Poorest hardest hit by inflation

30th March 2022

A report from EY Item Club has revealed that the fifth of households on the lowest incomes will be hit the hardest by rising inflation – suffering a 9.6% rise in living costs compared with an average of 8.6% for the richest fifth of households.

EY Item Club economists say inflation will peak next month at 8.5%, up from its February forecast of 7.2%.

The Office for Budget Responsibility, however, forecast a later peak of 8.7% in October when another big rise in energy bills is expected to push up household bills.

It is forecasted that growth will slow to 4.2% this year, down from the 4.9% previously expected. The OBR’s forecasts for growth this year have been revised down to 3.8%, from 6% over concerns that high inflation would erode the value of earnings and suppress demand for goods and services.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, said “CPI inflation accelerated to 6.2% in February from 5.5% in January, the highest rate since March 1992. February’s rise was largely due to stronger core inflation, reflecting several factors. The impact of rising global goods prices continued to feed through. There were upward pressures from the volatile clothing and footwear and recreation and culture sectors, the former reflecting unusual seasonal pricing patterns. And there were strong base effects, after a soft reading last February when the economy was in lockdown.”

“Inflation will rise significantly over the next two months. Petrol prices have increased in recent weeks in reaction to the rise in oil prices. Last week, pump prices were almost 15% above the February average. Inflation will then rise up again in April, as the 54% rise in the energy price cap takes effect, and the VAT rate for the hospitality sector returns to 20%. It’s possible that the Chancellor will use today’s Spring Statement to mitigate these upward pressures, perhaps via a temporary cut in fuel duty. But it’s unlikely that any fiscal intervention will stop CPI inflation rising to well over 8% in April.”

“What happens further out will be heavily influenced by the geopolitical situation and its impact on commodity prices. Though there has been more encouraging news on wholesale gas prices in recent days, a further increase in the energy price cap in October still looks likely, while petrol prices are likely to be slow to fall back. As such,  the EY ITEM Club expects CPI inflation to average close to 7% this year, generating the biggest squeeze on household finances for more than a decade.”