Inflation is set to peak again later this year

The ONS also released data on buying/selling prices, which helps illustrate the cost pressure within supply chains.

Input prices rose by 18.6% in the year to April, unchanged from March:

• Crude oil prices made a large negative contribution, as global oil prices eased from the aftermath of Russia’s invasion of Ukraine
• However, this was offset by positive contributions from a range of other categories such as fuel, home food materials and other produced materials.

Output price inflation peaked to 14.0%, the highest rate since July 2008:

• The largest contribution came from petroleum products, a gradual pass-through of the spike in the oil price following Russia’s invasion of Ukraine.
• Other positive contributions came from a broad range of categories such as food, metals, and machinery & equipment.

Input and output prices will likely remain high in the near term but should begin to ease as the prices of many commodities have stabilised or fallen back in recent months.

However, further shocks are still a risk – from disruptions of key supply chains to geopolitical developments, which could lead to higher or more prolonged input/output inflation.

One major area of concern for global commodities is food supply. In particular, Ukraine was a major exporter of cereals and the supply of these crops will be hindered by the disruption to shipping, and to spring planting and harvesting season.

Another recent concern is a heatwave in India, another major producer of these crops, which has now banned the export of strategic grain reserves.

Food producers across the world are also being affected by high fuel costs and rising fertiliser prices, as Russia was a key exporter in these markets. Anecdote from our members indicates that this is leading to some agricultural/horticultural firms in the UK reducing production, which poses a further risk to food prices/security.

There is likely to be second peak of CPI inflation in October this year, if global energy prices remain high – prompting another increase in Ofgem’s price cap for households (of around 42%, according to the latest estimate from Ofgem). The Bank of England’s current expectation is that inflation will therefore rise just over 10% in Q4.

Inflation is then expected to ease through 2023, falling below 4% by Q4 2023 and be close to the 2% target rate by mid-2024 – with a number of factors playing a key part:

• The economic pressure of COVID-19, which will fade away over the coming months
• Household spending is expected to be weak for the remainder of 2022, caused by a hit to domestic income – this will help reduce some of the pressure on prices over the next 18 months or so
• The energy prices currently shaping inflation will fade, with possible reductions in Ofgem’s price cap – global oil prices are expected to ease gradually throughout the next few years, and UK wholesale gas prices have already fallen below their post-invasion level.

The risk of further peaks of inflation is still concerning – with instability in commodity prices or further shocks to supply chains. There is also some uncertainty over the extent to which higher prices caused by “temporary” external shocks (like China’s COVID-19 lockdown or Russia’s invasion of Ukraine) could become more long-lasting, for example by raising people’s expectations of future inflation and wage growth, which could then in turn lead to bigger increases in prices in the years ahead.

According to CBI data, wage growth expectations for the year ahead are currently around 5%, a level that possible for businesses to sustain while still seeing low and stable inflation in the wider economy (but it may require a stronger productivity performance).

Our data also indicates that, while goods-oriented sectors expect price growth to pick up, services firms’ expectations for price growth remain relatively stable.