Home Editor's Pick Inflation breaches Bank of England target to hit 2.1% as lockdown is eased

Inflation breaches Bank of England target to hit 2.1% as lockdown is eased

by
0 comment

Inflation has risen more sharply than expected to hit 2.1 per cent in May after the reopening of the economy drove up prices for clothes, haircuts, transport and dining out.

For the first time since July 2019, the headline inflation rate breached the Bank of England’s 2 per cent target, taking policymakers and economists by surprise. Last month, the Bank said that inflation would not rise above 2 per cent until later in the year.

The Office for National Statistics stressed the figures had been distorted by “base effects” as last year’s lockdown led to sharp falls in the prices of many products, automatically causing an overshoot this year. A lack of data also meant many prices had to be “imputed”.

However, the pace of the increase came as a shock and separate ONS producer price data also pointed to underlying pressures. Inflation has now trebled in three months — from 0.7 per cent in March. It was last higher than 2.1 per cent in August 2018.

Output producer prices rose 4.6 per cent, the highest since January 2012. Input producer prices, the cost of materials, jumped by 10.7 per cent, the highest since September 2011. Inflation is on the march globally, rising 5 per cent in the United States in May, a 13-year high.

The pound jumped back above $1.41 as economists said that the surprise spike raised the prospect of a response from the Bank’s monetary policy committee, which meets next week. The Bank expects a temporary inflation overshoot due to base effects and the recovery in the oil price, but for inflation to settle back at 2 per cent.

Simon French, UK economist at Panmure Gordon, said it strengthened the “case for an early end to asset purchases”. The Bank has just over £50 billion of its £895 billion quantitative easing programme to complete. French added: “Unlike the US, where inflation is likely to have peaked, UK inflation is set to build through the second half.”

Last night, however, the US Federal Reserve warned that inflationary pressures could force the central bank to raise rates in 2023 rather than 2024, as previously forecast.

Related Posts

Leave a Comment