Surprise inflation rise leaves big gap in price rises facing poorer and richer households

A surprise rise in inflation last month – with CPI rising from 10.1 to 10.4 per cent – will further complicate the decision over what to do about interest rates when MPC members meet tomorrow, the Resolution Foundation said today (Wednesday) in response to the latest ONS prices data.

The inflation rise in February was against market expectations of a fourth consecutive monthly fall in the inflation rate. The rise was driven primarily by hospitality (where businesses are facing higher energy costs) and rising food costs (which remains at a 45-year high). The latter is a cause (along with higher household energy costs) of poorer families facing the greatest price pressures.

The poorest tenth of households face an inflation rate of above 12 per cent, compared to nearly 9 per cent among the richest tenth – around a 3.5 percentage point cost-of-living gap.

Looking further ahead, the Foundation says that inflation is still likely to fall rapidly as last year’s energy price shocks falls out of the annual data. Furthermore, concerns that rapid wage growth may be fuelling inflation look wide of the mark, with new RF analysis showing that pay growth ground to a halt last November.

James Smith, Research Director at the Resolution Foundation, said:

“The surprise inflation rise last month will further complicate the decision facing MPC members over what to do about interest rates, as they grapple with turmoil in the banking sector.

“Hospitality and food costs continue to drive up inflation. The latter means lower-income families are facing the greatest price pressures of all, with an effective inflation rate above 12 per cent.

“Significant falls in inflation are still on the cards in the coming months, with household energy costs set to start falling from July, and signs that pay growth has stalled.”