UK inflation tests BOE as it jumps to highest since 2018

Published Wed, Jul 14, 2021 · 07:03 PM

[LONDON] British inflation surged further above the Bank of England's (BOE) target in June to strike 2.5 per cent, its highest since August 2018, placing a new focus on the BOE's plan to keep its huge stimulus programme in place.

Prices for food, fuel, second-hand cars, clothing and footwear rose as the economy bounced back from its lockdown slump, the Office for National Statistics (ONS) said.

The jump exceeded all forecasts from economists polled by Reuters, who had mostly seen CPI edging up to 2.2 per cent from May's 2.1 per cent, and comes a day after US inflation hit its highest in 13 years at 5.4 per cent.

Sterling strengthened against the dollar and euro. Two-year British government bond yields, which are sensitive to short-term inflation and interest rates, touched a three-week high.

"The Bank (of England) will likely feel that the time is rapidly approaching to dial down the level of support they are providing to the economy," said Hugh Gimber, global market strategist at JPMorgan Asset Management.

Most central bankers think the global surge in inflation will be temporary, and reflects supply-chain bottlenecks as Western economies emerge from the coronavirus pandemic.

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The BOE revised up its forecast for inflation last month to predict a peak of over 3 per cent, though its outgoing chief economist, Andy Haldane, sees it nearer 4 per cent by the end of the year.

The BOE expects inflation to fall back towards its 2 per cent target over the next couple of years, as subdued pre-pandemic price trends and weak pay growth resume.

However, Wednesday's data revive questions about the BOE's decision last November to commit to £100 billion (S$187.98 billion) of new bond purchases throughout 2021. Mr Haldane voted in May and June to stop the programme early.

Financial markets are now pricing in a first rise in BOE interest rates to 0.25 per cent from their current 0.1 per cent by August 2022.

JOB PRESSURE

The central bank worries that the phasing out of the government's jobs subsidies programme by the end of September could lead to higher unemployment, which would take the heat out of inflation.

The CPI's acceleration reflects the weakness of demand last year when much of the economy was shut down and consumers were ordered to stay at home.

Global oil prices have climbed this year as the world economy recovers. Wednesday's figures showed British fuel prices in June were 20.3 per cent higher than a year earlier, the biggest rise since 2010.

Second-hand car prices also rose sharply, though not as much as in the United States, where they accounted for a third of the rise in inflation in June. In Britain, prices were up 5.6 per cent on the year - the biggest increase since January.

Higher used car prices reflected continued avoidance of public transport, production delays for new cars due to semi-conductor shortages and greater disposable income among many buyers who had spent less during the pandemic, the ONS said.

June's inflation data were also the first since restaurants reopened to indoor diners, and showed the biggest increase in prices since a similar reopening in July 2020.

Clothing and footwear prices rose by the most since February 2018, up 2.5 per cent on a year ago when they were depressed by lockdown restrictions.

Food prices were 0.6 per cent lower than a year ago, a smaller annual decrease than before and were 0.2 per cent higher on the month, adding to June's annual inflation rate.

Separate ONS data on Wednesday showed that house prices in May were 10 per cent higher than a year before, matching the rise recorded for March, which was the biggest since September 2007.

REUTERS

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