Calm before the storm as inflation holds steady ahead of an imminent oil shock

CPI inflation held steady at 3.0 per cent in February, but with soaring oil prices prompting the Bank of England to revise up its inflation forecast, this may be the last bit of good news on the cost of living for some time, the Resolution Foundation said today (Wednesday).

Beneath the headline figure for last month, the picture is mixed. There were rises in some key goods prices – particularly clothing and footwear where there was less discounting than a year ago. But there was downward pressure from petrol and food inflation – trends which we are set to see reverse sharply.

Indeed, the outlook is worrying. The Bank of England now expects inflation to rise to close to 3.5 per cent in March, driven in large part by higher petrol prices. Global oil prices have already risen beyond the $100 per barrel mark, and the UK is very much exposed to resultant price pressures. Higher oil prices will not just feed through to petrol pumps – they also drive up the cost of food and other essentials.

This makes the Government’s response to the coming price shock all the more important. Petrol prices, while immediately sensitive to oil market swings, are not the right lever for policy action. Energy bills – where prices remain around 60 per cent higher than in 2021 – are.

A social tariff for energy which targets support for the lowest-income household by offering a lower per-unit rate for energy would provide protection where it is really needed, at a price point the Government can responsibly afford. The infrastructure for a social tariff must be built now, before the pressure hits.

James Smith, Chief Economist at the Resolution Foundation, said:

“February’s inflation figures were consistent with a path back to the Bank of England’s 2 per cent target – but they represent the last missive from a lost world. The Bank now expects inflation to rise to around 3.5 per cent in the coming months, rather than falling back.

“The transmission of higher energy prices to the cost of everyday essentials like petrol and food mean that families who are already stretched face another squeeze on from the high cost of living.

“The government needs to act now to prepare for higher energy bills for the coming winter. The right response is to build the infrastructure for a social tariff. That groundwork needs to be laid now, so it’s ready to roll out in the Autumn as radiators are switched on and bills rise sharply.”