The wedge between the UK retail price index (RPI) and the consumer price index (CPI) widened to 3.3 percentage points in November, the highest it has been since records began in 1989. Typically, the RPI overstates inflation, for several reasons: because it uses different methods of aggregation, its choice of which items are included and the weights it attaches to those items. The widening gap is most probably a result of the rise in mortgage interest payments, an item that the RPI measure includes while the CPI does not. Mortgage interest payments were up 32.3% on the previous year in

On 3 February, the Bank of England’s Monetary Policy Committee (MPC) voted by a majority of five to four to raise Bank Rate by 0.25 percentage points, with four members preferring a larger 0.50 percentage point increase. However, December’s headline inflation figure, at 5.4%, was around a percentage point higher than had been expected back in November, when the Bank last published its Monetary Policy Report. In a sense, this week’s move represents a loosening of monetary policy over the past three months, with the nominal interest rate rising by less than inflation, implying a fall in the real rate

The Bank of England’s August Monetary Policy Report included an update of their macroeconomic projections out to 2024. The Bank now expects UK inflation to peak at 4% towards the end of this year and start of 2022, before drifting back towards target by the end of the forecast horizon. While many, including Fathom, agree with the Monetary Policy Committee’s assessment of the near-term outlook, there is less consensus beyond the end of this year. Key in the medium term will be how quickly excess pandemic-induced savings are spent and the extent to which higher short-run prices get embedded into

Refresh this chart in your browser | Edit the chart in Datastream Evidence is starting to build to support the case that the net result of the post-pandemic recovery will be inflation. As Fathom has discussed in recent research, the upward pressure on inflation will come in more forms than base effects, with pressures in the form of a build-up in household savings and the monetary overhang pushing up inflation too. But absent additional pressures, how big will those base effects be? As a measurable example, the UK government temporarily cut VAT from 20% to 5% for certain items of hospitality and