Social Security assistance - effects of inflation: report 2021-2022

3. Impact of COVID-19

3.1 The unprecedented COVID-19 pandemic has acutely affected inflation over the past few years. Considering the significant change in the CPI inflation rate over the last year, this report provides an overview of the reasons the CPI inflation rate has increased from 0.5% (September 2020) to 3.1% (September 2021).

3.2 Successful COVID-19 vaccination programmes and the subsequent easing of public health measures put in place to contain the virus spread have resulted in increased economic activity compared to the early stages of the pandemic as firms and households start to run down accumulated savings and return to the levels of production and spending that they usually would. The increase in demand in comparison to early stages of the COVID-19 pandemic has placed upward pressure on inflation.

3.3 Figure 1 shows how the monthly rate of CPI has moved over the last 12 months. The 3.1% CPI rate, compared to last September’s 0.5% rate, can partially be explained by a base-effect^[11] because prices and demand were lower than they otherwise might have been last year due to the restrictions in place as a result of COVID-19.

3.4 Alongside a shift in demand from services to goods, we have seen supply shortages for some products resulting in higher prices than in earlier stages of the pandemic.^[12] Strong global demand has also led to increased world export and UK import prices. The past year has also seen a strong contribution to the increase in CPI from the transport sector.^[13] Supply shortages have affected the production of new cars, resulting in increased demand and prices for second hand cars. There has also been a 9.7% inflation of air fares over the last 12 months. Additionally, the energy sector has contributed to the inflationary pressures after Ofgem’s 9% increase of the tariff cap in April 2021.^[14]

3.5 There was a slight slowing of inflation between August and September as CPI decreased from 3.2% to 3.1%. Restaurants and hotels made the largest downward contribution to the change between August and September^[15], offsetting the upward contributions from most other sectors including transport and housing and household services. The downward contribution from restaurants and hotels can partially be attributed to a base effect caused by higher restaurant prices in September 2020 than the previous month after the Eat Out to Help Out scheme expired. The upward contribution from transport is mainly driven by increase in motor fuel prices with the highest prices on record in 8 years.^[16]