Social Security assistance - effects of inflation: report 2020-2021

3. Impact of COVID-19

3.1 Considering the economic impacts of the COVID-19 pandemic, this report looks at the impact of COVID-19 on CPI inflation.

3.2 The COVID-19 pandemic and the public health measures put in place to contain it, including social distancing, restrictions on activities and national or local lockdowns have all resulted in reduced economic activity as firms and households are unable to produce and spend as they usually would. The collapse in demand since the start of the COVID-19 pandemic has placed downward pressure on inflation.

3.3 Figure 1 shows how the monthly rate of CPI has moved over the last 12 months. Alongside the fall in demand, the drop of CPI rate in the second quarter of 2020 partly reflects the Office for Gas and Electricity Markets (Ofgem) lowering its energy price cap in April and the recent falls in oil prices.^[13] In addition, the implementation of social distancing policies and movement restrictions in response to COVID-19 posed measurement challenges and as a result the ONS temporarily had to rely on imputing prices when the usual quotes were missing.^[14] The Bank of England recognises that this has temporarily increased the noise in inflation data, and affected the CPI inflation relative to a normal period.^[15]

3.4 The increase in inflation between August and September largely reflects the upward contributions from transport, restaurants and hotels.^[16] The increase in transport costs is mainly driven by airfare prices (although these continued to fall between August and September, they fell by less than between the same two months a year ago) and the purchase of second-hand cars resulting from more people seeking alternatives to public transport. The upward contribution from restaurants and hotels reflects the end of cheaper restaurant and café meals after the Eat Out to Help Out scheme expired.^[17]

Source: Office for National Statistics – Consumer Price Inflation Table 1 (link)