Finance News

Inflation rises at fastest rate in over 20 years to 3.2%

Rozi Jones
15th September 2021
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"The Bank of England will have noted this morning’s release ahead of their next meeting on 23rd September when it’s possible they will take a more hawkish tone."

CPI inflation rose by 3.2% in the 12 months to August, up from 2.0% in July, according to the latest figures from the ONS.

The increase of 1.2 percentage points is the largest ever recorded increase in the inflation rate series, which began in January 1997.

On a monthly basis, CPI increased 0.7% in August 2021, compared with a fall of 0.4% in August 2020.

CPIH inflation, which includes owner occupiers' housing costs, rose by 3.0%, up from 2.1% in July. This increase is also the largest increase ever recorded in the CPIH series, which began in January 2006.

However, the ONS says these record increases are "likely to be a temporary change".

The largest upward contribution to change is a base effect, partly due to discounted restaurant and café prices in August 2020 resulting from the government's Eat Out to Help Out scheme and, to a lesser extent, reductions in VAT across the same sector.

The largest upward contribution to the CPIH inflation rate came from transport with further large upward contributions from restaurants and hotels, housing and household services.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The Bank of England will have noted this morning’s release ahead of their next meeting on 23rd September when it’s possible they will take a more hawkish tone. With the ECB and Federal Reserve beginning to make their moves in terms of tapering, it won’t be long until the BoE feels it has to act as the recovery continues to take shape. It will be hoping, however, that the inflation pressures being experienced around the world will ultimately prove to be transitory given the latest consumer price data out of the US yesterday saw a tempering of price rises. We will wait to see if the worst is now behind us.”

Kevin Brown, savings specialist at Scottish Friendly, commented: “Inflation has continued to rise since its low in February, and the announcement today that CPI hit 3.2% and CPIH hit 3.0% in August, shows it isn’t slowing down.

“Not only is this higher than predicted, it is also the highest level of inflation since 2012, a worrying fact for many.

“A surprise downward turn in July was short-lived and the Bank of England is now expecting inflation to reach highs of 4% in the last quarter of 2021. Many indicators have been showing for a while that inflation is likely to hit 4%, but we believe it could surpass this and reach over 5% in the near future.

“We are starting to see the effect of rising inflation on households already, with supermarket shortages and the lack of lorry drivers hitting the headlines. Without a solution to rising commodity and shipping costs as well as Brexit-related red tape, the lead up to Christmas could prove tough for many families across the UK.

“Every month that inflation continues to rise, the question remains as to whether interest rates need to go up to match. This would mean the cost of living could be considerably higher by the end of the year, not good news for households.”

Kate Smith, head of pensions at Aegon, added: “Today’s figures come one month ahead of the all-important inflation figure for September which will confirm how much the state pension increases by in April. Following the one-year suspension of the ‘triple lock’, the state pension will increase by the higher of September’s inflation figure (published October) or 2.5%. With CPI rising steeply in August and expected to continue this path to the end of the year, state pensioners could see a substantive increase in payments in April, even with the earnings element of the triple lock stripped out.

“The state pension has only seen an above-3% increase three times since the triple lock was first used as the uprating mechanism a decade ago*.

“If inflation next month is the same as today’s rate, then pensioners receiving the full new state pension will see an increase in weekly payments from £179.60 to £185.35, and those on the basic state pension will see an increase from £137.60 to £142 per week. However, if inflation rises further, a rate of 3.5% would mean the new state pension will increase to £185.90 a week and the basic state pension will increase to £142.40 a week.”

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