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Demand for second-hand cars and the closing of the Eat out to Help out scheme at the end of August resulted in a jump in monthly inflation in September, but price rises are still well below trend and suggest the Bank of England has scope to ease monetary policy further.
According to the ONS, CPI inflation for September rose 0.5% year-on-year, which is in line with market expectations and notably higher than the 0.2% rise recorded in August.
Inflation rose 0.4% from August to September, which is slightly less than the 0.5% the market was expecting but well above the -0.4% recorded in the July to August period, helping ensure the country avoided a bout of deflation.
The ONS says transport costs, and restaurant and café prices, following the end of the Eat Out to Help Out scheme, made the largest upward contributions to prices.
"The UK has dodged the deflationary bullet, for now at least. August’s Eat Out to Help Out scheme dragged inflation down perilously close to negative territory, so September’s increase to conventional, albeit weak, price growth is a return to a semblance of normality if nothing else," says Sam Fuller, Director of Financial Markets Online.
The largest upward contribution to inflation in September 2020 came from recreation and culture, which the ONS said added 0.31 percentage points to the headline year-on-year rate.
The ONS reports that a jump in the number of people seeking out second-hand cards contributed to rising prices, which was reflected in the upward pull that transport made to the price bucket the ONS uses to gauge inflation.
This is the first time since the start of lockdowns in March that transportation contributed to an increase in prices, and the ONS says second-hand car prices have potentially been boosted by increased demand as people, reportedly, look to reduce their reliance on public transport.
Separate data from the ONS shows that in the year to September, the costs of raw materials fell by 3.7% which could mean the outlook for CPI inflation will remain subdued and will likely ensure the Bank of England maintains an accommodative steer.
The Bank of England is widely expected by economists to increase its quantitative easing programme over coming months, and speculation has mounted that a further interest rate cut is possible, which could take the Bank Rate to 0% or below, which could prompt further weakness in Sterling.
"Both CPI and PPI are best seen as being less bad than they were. By taking some pressure off the Bank of England on the inflationary front, today's data will give its monetary policy grandees a freer hand to worry about the greater challenge of how to stimulate Britain’s flailing economy," says Fuller. "These are modest moves in the right direction, no more. But with both the number of Covid cases and levels of political instability going the opposite way, the markets will take this good news while they can."
"The outlook is still only consistent with a gradual uptrend, particularly with the headwinds to economic activity beginning to increase again following the stepping up in localised lockdown measures seen in recent days," says Nikesh Sawjani, UK Economist at Lloyds Bank, who adds the Bank of England are likely to offer more stimulus in light of the data.