• UK CPI inflation has risen to 1.5%, up from 0.7% last month
• Oil price will continue to exert upward pressure on inflation
• Inflation is coming from key consumer spending items- transport, clothing and household energy
• UK inflation expectations have climbed to their highest level since 2008 (see chart below)
Laith Khalaf, financial analyst at AJ Bell, comments:
“Inflation has doubled, with price rises occurring in key areas where it’s hard for consumers to control spending, namely transport, clothing, and household energy. Those with a sweet tooth will also be perturbed to learn the price of chocolate bars and ice creams is on the up, particularly in a year when travel restrictions mean getting moderately beach fit is no longer a top priority.
“At current levels, inflation is nothing to fret about, but there is rising concern that the fiscal and monetary response to the pandemic has sown the seeds of an inflationary scare further down the road. For the moment, the Bank of England is dismissing consumer price increases as a natural bounce back from the depths of the pandemic last spring. But the economic recovery could be a Trojan horse, smuggling inflation into the UK, right under the nose of central bankers.
“Much of the inflation of the last year can be explained away by an oil price rising from an exceptionally low $20 a barrel last spring to around $70 today. This effect will moderate as we start lapping the summer months of 2020, but even if oil prices remain where they are, they will continue to exert upward pressure on the headline rate of inflation number for the remainder of the year. What’s more, as the global economy opens up, there is potential for further price rises as demand picks up again.
“The UK is still way behind the US, where the latest inflation reading came in at 4.2%, and CPI inflation is still below the Bank of England’s 2% target. The Bank has made it clear that it will tolerate inflation rising modestly above target, without pulling the trigger on interest rate rises. However, if inflation looks like it’s going to get a significant foothold, markets will take matters into their own hands and raise borrowing costs across the economy. Inflationary fears have already started to trickle into markets, with the ten-year gilt now yielding 0.9%, up from 0.2% at the beginning of the year.
“If realised, a sustained inflationary period would be a paradigm shift from the last twenty-five years of extremely benign price rises, which have provided comforting mood music for stocks and bonds. Investors don’t need to hit the panic button just yet, but they do need to factor the potential for higher rates of inflation into their plans. Where inflation is concerned, it’s better safe than sorry.”
Source: Thomson Reuters Eikon
Source: Bloomberg
