UK inflation surges to nine-year high of 3.2% in August as food and fuel prices jump

UK restaurant dining drinking bar
Prices for eating and drinking out rose in August as inflation hit 3.2%.

  • UK inflation rose to reach its fastest pace in nine years in August, hitting 3.2% year-on-year.
  • The Office for National Statistics said gains in food, restaurant and transport prices were key factors.
  • Economies around the world are dealing with strong inflation, putting pressure on central banks.
  • See more stories on Insider’s business page.

UK inflation hit a nine-year high in August as the economy reopened, with food and fuel prices climbing sharply, the country’s Office for National Statistics said Wednesday.

Year-on-year consumer price index inflation came in at 3.2% in August, the fastest rate since March 2012, after slowing to 2% in July. Economists had been expecting a rise to 2.9%, according to Bloomberg data.

Month-on-month, CPI inflation came in at 0.7% in August after flatlining in July, the ONS said. Economists had been expecting a rate of 0.5%.

The ONS said gains in prices of food, restaurants and hotels, and transport contributed to the jump. It said rising fuel prices were the main factor pushing up transport costs.

However, it urged caution in reading too much into August’s numbers. The statistics body said a factor pushing up year-on-year inflation was the fact that food prices fell sharply in August 2020, the comparative month, as a result of the government’s “eat out to help out” meal subsidy scheme.

The pound climbed after the data was released and stood 0.15% higher at $1.383 in European trading. The FTSE 100 stock index was roughly flat.

Read more: Real estate will play a vital role for investors as inflation heats up, according to the world’s largest asset manager. Here are 8 things BlackRock says investors should focus on as they fill out their real-asset portfolios.

Inflation has surged in the UK and other advanced economies in recent months as growth has bounced back after the lifting of coronavirus restrictions.

The Bank of England has predicted that inflation will rise as high as 4% before the end of the year. But, along with the US and Eurozone’s central banks, it thinks the price rises will prove transitory and expects inflation to fall back to its 2% target by 2023.

Yet Paul Dales, chief UK economist at Capital Economics, said August’s figure may well be the first step to inflation shooting up to 4.5%. He said higher energy prices are likely to push up the figure further than the Bank of England thinks.

But he added: “Inflation will fall sharply next year as a lot of these upward influences unwind. By the end of 2022, it may be below 2.0% again.”

Dales said the next few months will be an “uncomfortable period” for the BOE but said it is unlikely to raise interest rates from their current record-low level of 0.1% until 2023.

The UK data came a day after figures showed that US CPI inflation cooled to 5.3% in August from a 13-year high of 5.4% in July. Month-on-month, US inflation slowed to 0.3% from 0.5% a month earlier.

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Joe Manchin’s inflation worries are threatening Biden’s agenda, but we might have just passed the peak hysteria over runaway price hikes

joe biden joe manchin
President Joe Biden’s agenda depends on winning the support of Sen. Joe Manchin, and that depends on how he thinks inflation will get.

  • People have been worried about runaway inflation all summer, including Sen. Joe Manchin, but the latest CPI report showed a slowdown.
  • Some of the big pandemic-era drivers of inflation, like used cars, started falling back to earth.
  • Other worrisome “sticky” prices, like rent, haven’t shown signs of accelerating yet.
  • See more stories on Insider’s business page.

Summer is almost over, and the latest economic data suggests that the season’s inflation mania is also reaching an end.

Former Treasury Secretary Larry Summers kicked off the fears among the economic chattering class in March, calling Biden and the Fed’s approach the “least responsible” macroeconomic policy in 40 years – meaning even less responsible than the 2008 housing bubble that nearly brought down the world economy.

Fast forward to August’s consumer price index, and the argument in favor of “team transitory” – ie, Biden and the Fed – look stronger and stronger.

Consumer prices rose 0.3% in August, the Bureau of Labor Statistics said Tuesday, marking the second straight month of a slowdown in price growth. The Consumer Price Index – a popular measure of US inflation – still sits at decade highs on a year-over-year basis. But the slower growth seen in August suggests inflation could be tapering off and matching the predictions of the Biden administration and the Fed.

As the US economy began reopening in late spring and early summer, inflation leaped higher. June alone saw a 0.9% month-over-month increase in prices, the fastest price growth since the financial crisis.

Several Biden administration officials, including Labor Secretary Marty Walsh, said that they weren’t overly concerned about inflation this summer and they believed such price spikes would be temporary. Similarly, Fed Chair Jerome Powell said in Congressional testimony in July that most inflation was coming from transitory reopening shocks and should abate through the rest of the year.

On the other side of the debate, beyond Summers, the powerful moderate Sen. Joe Manchin cited worries about runaway inflation in a Wall Street Journal op-ed explaining his trepidation around Democrats’ $3.5 trillion social spending proposal. Tuesday’s read of easing inflation data could make trillions of dollars of a difference if it changes Manchin’s mind on what he may support.

Where inflation is easing up, and where it poses a lasting threat

The details of the report suggest that the worst could be behind us. Used cars and trucks have been one of the big drivers of inflation this year, with prices skyrocketing in the spring and early summer amid pandemic-caused supply shortages and a wave of new demand. Yet those prices actually declined in August, after seeing several double-digit monthly increases:

Other pandemic-affected sectors like airline tickets saw sharp increases in the spring, but had a 9.1% month-over-month decline in August as the Delta wave curbed demand.

In addition to those slowdowns in sectors highly affected by the pandemic, the August CPI report also showed few signs of more deeply rooted inflation that could prove a problem in the longer term.

The housing market is host to some of the most worrying inflation trends. Homebuyers have been facing an uphill battle all summer, with prices in many hot markets skyrocketing. Despite that, broad price increases for housing have remained modest. The shelter sub-index measured by the Bureau of Labor Statistics has risen steadily during the pandemic, but at a slower pace than overall inflation. August saw an even more modest increase in shelter prices:

So far, there hasn’t been an acceleration in the price of shelter. That’s a good sign for longer-term inflation, since house prices and rents tend to be “sticky,” meaning that increases tend to only ratchet up and declines in prices are very rare. The type of long-term inflation feared by Summers and Manchin would likely start showing up in the above chart, and it hasn’t materialized yet.

The August inflation report, then, makes it look like price increases are starting to simmer down. Team transitory is firmly in the lead.

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UK inflation dropped unexpectedly to 2% in July, but economists think it won’t be long until it shoots up again

London shops coronavirus
The UK government has lifted most coronavirus restrictions.

  • UK inflation unexpectedly fell to 2% in July, the Office for National Statistics said Wednesday.
  • Economists said the dip is likely temporary and prices should rise sharply by the end of the year.
  • The Bank of England has said it is likely to have to tighten monetary policy to keep a lid on inflation.
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Prices across the UK economy rose 2% in the year to July, the Office for National Statistics said Wednesday – a lower than analysts were expecting and a slowdown from inflation of 2.5% in the year to June.

Economists said the slowdown in consumer price index, or CPI, inflation was likely a blip. They said prices should start rising sharply again over the coming months, as the economy rebounds after the government eased coronavirus restrictions.

The ONS said the unexpectedly strong slowdown was in part due to “base effects”, given that inflation rose sharply in July 2020, the month that the latest figure is measured against. Economists said base effects should help drive up inflation readings before the end of the year.

“July’s data is likely to represent brief respite from the upward movement in inflation rates,” said Martin Beck, senior economic advisor to the EY Item Club.

“August will see base effects push annual inflation up again, with last August having seen both the [value-added tax] cut for the hospitality sector and the eat out to help out [meal subsidy] scheme.”

Read more: A US portfolio manager at a $49 billion investment firm shares 5 foreign stocks with immense upside – and explains how investors can use emerging markets to hedge their losses in developed-market companies

The ONS said lower clothing and footwear prices weighed on July’s inflation reading, as retailers brought back summer sales after scrapping them during the pandemic. But this was offset by a sharp rise in the price of second-hand cars, due to a shortage of new models.

Britain’s FTSE 100 stock index was down 0.36% after the data was released, while the pound was up 0.13% against the dollar at $1.376.

The Bank of England said earlier this month that it expects inflation to rise to 4% towards the end of the year. Britain’s central bank said “some modest tightening of monetary policy is likely to be necessary” over the next two years to keep price rises in check.

Ruth Gregory, senior UK economist at Capital Economics, said: “Despite July’s fall, we still expect inflation to reach about 4.5% by November.”

She added: “So the coming months won’t be comfortable for the [Bank of England’s] Monetary Policy Committee. But provided inflation expectations and underlying pay growth do not rise significantly, we think that inflation will fall back to just 1.5% by the end of 2022.”

Gregory said this means the Bank will be able to look through the upcoming spike in inflation and keep interest rates at their current, record-low levels of 0.1% until mid-2023.

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Mohamed El-Erian says the Fed should be tapering already amid inflationary signals – and recommends buying tech stocks in a rising-price environment

Mohamed El-Erian, Chief Economic Adviser of Allianz appears on a segment of "Mornings With Maria" with Maria Bartiromo on the FOX Business Network at FOX Studios on April 29, 2016 in New York City.
  • The Federal Reserve should already be tapering asset purchases amid inflationary signals, Mohamed El-Erian said Monday.
  • “The Fed is late,” he told CNBC. “They are going to be very dovish for very long. They’ve already proven it.”
  • The famed economist also said he prefers to be in the technology sector given the rising-price environment.
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The Federal Reserve should already be tapering assets purchases amid inflationary signals, Mohamed El-Erian said on Monday ahead of the figures for July CPI due this week. The famed economist also said he prefers to own tech stocks in such a rising-price environment.

“The Fed is late. It should have started tapering already,” El-Erian told CNBC on Monday. “I think the market continues to believe that the Fed will hold out from tapering as long as possible and, therefore, will not raise rates for a while. They are going to be very dovish for very long. They’ve already proven it.”

Given this inflationary setup, the chief economic adviser at Allianz laid out two reasons why he favors tech stocks.

First, he noted that tech companies have proven especially adept at navigating changes in a COVID-impacted environment. Some such examples are Facebook, Apple, and Microsoft, which saw explosive growth during the height of the pandemic.

Secondly, he said these very same firms are less impacted by inflation, and can keep revenues afloat better than any other industry.

“So, they have a revenue advantage and they have a cost advantage, and therefore they have a very strong earnings advantage,” he said.

El-Erian also touched on July’s stellar jobs report, which saw the US economy adding 943,000 payrolls in that month.

“The wage numbers on Friday’s report were really good for the US economy” but were “less good for input costs,” El-Erian told CNBC. “If the inflation proves to be tamed, then you’ve got the Goldilocks.”

A Goldilocks economy, he explained, comes from the combination of both approaches.

“Top-down has been continued ample, predictable liquidity,” he told CNBC. “Bottom-up has been strong earnings, and that has powered the markets through all sorts of things.”

El-Erian did say inflation will eventually “exhaust itself” though on a “much longer timeframe than what the Fed expects right now.”

He’s repeatedly pointed to people’s lack of understanding of how it is already spreading throughout the economy and has countered the Fed’s longstanding narrative that inflationary pressures are temporary.

The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.

Read more: Credit Suisse says buy these 21 growth stocks now as it’s the perfect time for them to thrive while rates fall – and to minimize the risk of losses

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UK inflation jumped to a three-year high in June, driven by price increases in clothes and second-hand cars

UK reopening coronavirus shopping
Clothing prices rose in June after UK stores reopened.

Prices across the UK economy rose at the fastest rate in three years in June, official data released Wednesday showed, as Brits spent on clothes and meals out as the economy reopened.

The UK consumer prices index rose 2.5% in the year to June 2021, from 2.1% in May. It was the highest reading since August 2018 and above economists’ expectations for a 2.2% increase.

Britain’s Office for National Statistics said prices rose in particular for food, second-hand cars and clothing in the year to June, as well as for eating and drinking out and motor fuel.

“Some of the increase is from temporary effects, for example rising fuel prices which continue to increase inflation, but much of this is due to prices recovering from lows earlier in the pandemic,” Jonathan Athow, deputy national statistician at the ONS, said.

When looked at month-on-month, CPI inflation rose 0.5% in June 2021 compared to 0.6% in May.

The pound was up 0.3% after the figures were released at $1.385, while London’s FTSE 100 was fell 0.44% at the open. Yields on 2-year government bonds rose 2 basis points on the day to 0.12%, nearing their highest in three weeks.

Read more: BlackRock unpacks how it’s investing in global stocks from the US to China in the 2nd half of 2021 – and why it remains ‘pro-risk’ in a higher-inflation environment

The stronger-than-expected inflation figures pose a challenge for the Bank of England which, like many central banks around the world, has insisted strong inflation will be temporary.

On Tuesday, data showed US inflation rose by more than anticipated to a 13-year high in June, with prices across the economy jumping 5.4% year-on-year.

Paul Dales, chief UK economist at Capital Economics, said June’s UK inflation figures came as a surprise. But he added: “We think this surge in inflation will be temporary, which means the Bank of England won’t tighten policy in response.”

Dales said: “We suspect CPI inflation could climb towards 4% around the turn of the year, which would be higher than the 3% peak expected by the Bank and most forecasters.

“But this will probably be a temporary spike related to reopening effects and the previous gains in commodity and component costs. As such, we are not expecting the Bank to respond by tightening policy in either 2021 or 2022, and probably not 2023 too.”

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Prices keep rising but bitcoin still isn’t behaving like the inflation hedge it is said to be

Bitcoin golden physical coin illustration on United States Dollar banknotes.
  • Inflation concerns were further stoked Tuesday when the CPI saw its largest one-month increase in 13 years.
  • Yet bitcoin, widely viewed as a hedge against inflation, dipped lower after the CPI reading.
  • Some bitcoin bulls, however, maintain that the cryptocurrency will prove its use as a hedge against rising prices.
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Inflation concerns were stoked on Tuesday when consumer prices between May and June saw their largest one-month increase in 13 years, but bitcoin, often touted as a hedge against a weaker dollar, failed to respond in kind.

US stocks dipped at the open, while bitcoin was flat and then steadily dropped over the course of the morning and early afternoon. The price of the world’s largest cryptocurrency by market capitalization was lower by about 2%, below $33,000 for most of the day following the announcement of the CPI figures.

The asset was trading at $32,854 as of 1:10 p.m. ET Tuesday.

This has happened with past readings, as well. In May, bitcoin fell 7% on a day when CPI data showed prices rising at their fastest rate since 2008. Theoretically, with higher inflation, demand for assets that can serve as alternative stores of values to cash would rise – bitcoin among them.

“Bitcoin isn’t behaving like an inflation hedge anymore and will continue to remain heavy over expectations over higher yields,” Ed Moya, senior equity analyst at foreign exchange firm Oanda, said in a Tuesday note.

That inflation is viewed as transitory, however, could be a reason why the June report wasn’t enough of a catalyst to break bitcoin’s sideways trading, Moya added.

Bitcoin has long been heralded as a hedge against inflation mainly due to its finite 21 million supply of coins. The idea is that bitcoin serves a similar purpose to gold in protecting against reckless fiscal policies that devalue fiat currencies.

Billionaire investor Mike Novogratz once said bitcoin’s value has increased because governments are printing money like “toilet paper.”

Some bitcoin bulls, however, maintain that the cryptocurrency will still prove its purpose one day.

“Bitcoin is still a hedge for inflation in the long run for most investors,” John Wu, president of Ava Labs, the team behind the altcoin avalanche, told Insider.

He continued: “However, given the amount of new investors in the space, there are investors that think of it as a risk asset and those incremental investors may be selling in the short term as a source of fund.”

Bitcoin’s price has been rangebound since a broader cryptocurrency crash in May.

But it seems that the digital asset is holding firm at its $30,000 support level the more it gets tested, Julius de Kempenaer, senior technical analyst at technical analysis platform, told Insider.

“As a result, an eventual break below this level will become more and more meaningful,” he said. “If and when this happens, $20,000 is on the cards as the next level of support to watch.”

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Global shares hover near record highs as rising COVID cases and a slew of economic data leaves investors cautious

Stock Market Traders
  • Global shares remained near record highs despite COVID-19 cases continuing to rise.
  • US inflation, Chinese quarterly economic data and Jerome Powell’s semi-annual testimony to Congress are in focus.
  • Growth in Japan’s machinery sector boosted Asian stocks as it indicated sustained economic recovery.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Global shares were mixed on Monday, with economically sensitive sectors such as energy and banking under pressure, while more defensive parts of the market such as healthcare rose, as as COVID-19 cases linked to the delta variant continued to rise and bring renewed lockdowns.

Key data on US consumer inflation and regional manufacturing activity along with Chinese economic growth could provide a steer on how much the resurgence of COVID-19 is impacting the global recovery.

Federal Reserve Chairman Jerome Powell will also deliver his semi-annual testimony on the state of the economy to Congress this week, while the European Central Bank will revise its current monetary policies, which investors are expecting will provide them with guidance on growth and inflation in the eurozone.

US futures were a mixed bag, as Dow Jones futures dipped by 0.29% and S&P 500 futures were down 0.19%, while Nasdaq futures were up by 0.11% at 04:30 am E.T. on Monday.

“In the US, CPI data tomorrow will tell us whether we did indeed see the peak in inflation in May – our economists think we did, forecasting a slowdown in headline CPI from 5.0% to 4.8% in June, potentially putting a cap on Fed rate expectations for now.” ING analysts said.

The yield on the US Treasury 10-year note was last at 1.333%, down by 2.3 basis points, reflecting a degree of investor demand for so-called safe haven assets.

Rising COVID-19 cases linked to the Delta variant are also weighing on global markets as they signal a potential delay in post-pandemic economic recovery.

“We’re also seeing higher case counts in the UK, US and Europe, which could also add to the uncertainty,” Michael Hewson, chief market analyst at CMC markets said. “The lower vaccination rate in Europe could prove problematic in the days ahead,” he added.

European stocks dipped on Monday. Frankfurt’s DAX was last down 0.14%, while London’s FTSE 100 dipped by 0.56% and the EuroStoxx 50 index of top eurozone stocks was 0.25% lower.

The European Central Bank might announce revisions to its monetary policy at its meeting this week, but will not end its post-pandemic recovery program, ECB President Christine Lagarde said on Bloomberg TV.

Asian markets were boosted by Japanese machinery orders rising for the third consecutive month in May and the country posting higher than expected producer price index readings on Monday. The data releases boosted investor confidence in the economy recovering despite a rise in COVID-19 cases in the region.

Tokyo’s Nikkei 225 rose by 2.25% in response and pulled shares across the region up with it as the Shanghai Composite closed 0.67% higher and Hong Kong’s Hang Seng index rose by 0.65%.

The energy sector broadly declined on Monday. OPEC+ reached no agreement on production and abandoned a planned meeting last week, which has raised concern that the group could splinter and raise output at will. Brent crude futures were last down by 1.19%, trading for $74.65 per barrel, while WTI crude fell 1.17% to $73.69 a barrel. Natural gas was last trading 1.06% lower, while heating oil declined by 1.35%.

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The Instagram effect is pushing up the prices of ‘grammable activities like meals out and vacations – creating opportunities for investors

US reopening concert phone picture Instagram
Consumers are rushing out to spend as economies reopen.

Locked down during the pandemic, Americans and consumers around the world spent big on things like gadgets and gym equipment to make their time at home more bearable.

But as economies reopen, people are splurging their cash on vacations, new clothes, and meals out.

Paul Donovan, chief economist at UBS Wealth Management, calls it the Instagram effect.

He says people want to show off again after months of lockdown, leading them to splurge on things they can post on the ‘gram.

Donovan says the shift in spending patterns is pushing up inflation in some areas but helping bring it down in red-hot sectors like lumber. He expects the change to continue and argues it will be a good thing for markets and investors by lowering price pressures overall.

“In the next few months people will only spend money on things they can post about on Instagram afterwards,” Donovan told Insider. “So that’s going out and new clothes, essentially.”

Clothing and meals out have become dearer

In the US, inflation has hit a 13-year high, driven in large part by a sharp rebound in energy prices.

But prices in Instagrammable categories have also risen sharply, official data shows. The price of food bought away from home – i.e. at restaurants or hotels – rose 0.6% month-on-month in May, from 0.3% in April.

Clothing prices rose 1.2% compared to 0.3% in April. And airline fares jumped 7% after surging 10.2% a month earlier as vacations picked up again.

In the UK, the head of the Bank of England noted that the price of haircuts had jumped, suggesting people were trying to recreate “the early 1990s David Beckham look.”

Read more: The Fed has left rates steady while signaling 2 potential hikes by the end of 2023. Here is what to do with your stocks, bonds, and digital assets, according to top Wall Street and crypto investors.

The shift to Instagrammable spending could cool inflation

Markets have been worried about inflation in 2021, as strong price rises eat away at the earnings on stocks and bonds.

But Donovan thinks the Instagram effect is one reason that strong inflation will prove transitory, as the Federal Reserve has argued.

He said service businesses like restaurants are better placed than goods providers to adapt to strong demand, making the sort of supply bottlenecks that have driven up the prices of products like lumber and microchips less likely.

Bank of England governor Andrew Bailey made a similar point on Thursday, saying inflation should ease “as spending is redirected towards sectors with more spare capacity.”

Donovan said the outlook is good for stocks: “I think markets will be content to almost ignore the inflation story.”

Hugh Gimber, global market strategist at JPMorgan Asset Management, said spending on things like luxury goods and meals out could well boost the shares of companies in those sectors.

But risks remain and could rattle markets

Yet he also warned that inflation could yet stick around longer than a lot of people expect. He said rising wages, as sectors reopen and look for workers, could create price pressures across economies.

Stronger-than-expected inflation could yet rattle markets, Gimber told Insider. Fears over price rises did exactly that in early May, when the S&P 500 lost 2% in a day after inflation data came in hotter than expected.

Donovan also said there were risks to his view that inflation would fall back as the Instagram effect picked up speed. “If we don’t start to see the deceleration of inflation in the States that I expect to see, that would worry markets about the timing of rate moves,” he said.

But for now, investors are feeling much less worried about inflation, helping stocks rebound to record highs. Coincidentally, Instagram-owner Facebook is up more than 7% over the last month.

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The Fed’s favored inflation gauge is at its highest since 1992, but Goldman Sachs says this ‘one-off inflationary boost’ will soon flip to a ‘one-off disinflationary drag’

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  • The core PCE price index, the Federal Reserve’s favorite measure of inflation, rose in May at its fastest since 1992.
  • Goldman Sachs analysts said this “one-off inflationary boost” will over time become a “one-off disinflationary drag” over time.
  • They predict that core PCE inflation will drop to 3% by the end of 2021, and slip further to 2% by December 2022.
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The Federal Reserve’s favored measure of inflation rose at its fastest pace since 1992 last month, driven primarily by price rises in products like cars, chips and furniture, but Goldman Sachs said this rise in inflation is temporary and will reverse itself over time.

The core Personal Consumption Expenditures price index, which strips out volatile food and energy prices, showed on Friday that personal spending had stagnated and inflation had picked up in May by 3.4% year-over-year.

Hold-ups in the supply chain – for goods such as semiconductors – and in global shipping have helped drive prices for consumer goods above pre-pandemic levels, Goldman Sachs analysts said in a research note Sunday.

On the demand side, coronavirus stimulus checks have pushed up buying of more expensive purchases, they noted. As a result, consumers are paying higher prices for new and used cars, consumer electronics, computer chips, furniture, appliances, and sports equipment.

“Prices in supply-constrained categories are likely to remain firm for at least a couple more months, but should eventually partially revert to pre-pandemic trends,” the analysts wrote. “This means that the current one-off inflationary boost will eventually become a one-off disinflationary drag.”

Goldman Sachs predicts that core PCE inflation will drop to 3% by the end of 2021, and slip further to 2% by December 2022, pulled lower by the falls in those product categories and as the boost from the reopening of the travel sector fades.

The Fed uses core PCE as its primary gauge of inflation, and it has signaled it will let inflation run above 2% for a time to allow the labor market to recover from the impact of the pandemic. It expects any jump in inflation during the recovery will be transitory, and a high rate of year-on-year price growth is seen as stemming from a comparison with levels in the early phases of the pandemic.

The supply and demand pressures will ease at different rates in the affected categories, the Goldman Sachs analysts said. Semiconductors should shake off their recent big price rises by the end of this year as the shortage improves, though the market is likely to stay under pressure until 2023, they forecast. Auto production could start to return to normal as early as the third quarter this year, as plants work through the summer shutdown, the analysts believe.

This return to normal will be brought on by a range of factors, such as growth in production capacity, better usage of current production resources, and an end to the global supply-chain snags.

“In short, the global goods sector is best thought of as facing a number of serious disruptions and challenges as the world economy recovers from the pandemic, not as having been pushed to its productive limits by the current level of demand,” the analysts said.

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UK inflation unexpectedly surges to 2.1% in May as Brits splurge after lockdown – and economists think prices have further to rise

UK woman shopping shops red bus economy reopens London
Rising clothes prices helped push up inflation in May after non-essential stores reopened.

  • UK inflation unexpectedly jumped to 2.1% in May as the economy reopened, data showed Wednesday.
  • The reading was above analysts’ expectations and higher than the Bank of England’s 2% target.
  • Economists say prices have further to rise as more restrictions are lifted, at least in the short term.
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UK inflation shot up by 2.1% in May, more than economists were expecting and above the Bank of England’s target of 2%, as the reopening of the economy pushed up the cost of fuel, clothing, and meals out.

The 2.1% year-on-year increase was the biggest since July 2019, the Office for National Statistics said Wednesday, and compared with an increase of 1.5% in April.

Core inflation – which strips out volatile categories like food and energy – climbed 2% year-on-year, the most since August 2018.

The pound rose after the data was released, and traded 0.23% higher against the dollar at $1.411. Britain’s FTSE 100 stock index was up 0.27% in early trading.

The ONS said the rise in inflation in May was led by fuel prices. Part of the increase was due to so-called base effects, given that energy prices fell sharply in May 2020, the comparative month.

But clothing prices also added upward pressure as stores reopened and cut back on discounting. Meals and drinks consumed at pubs and restaurants also became more expensive after they were allowed to resume business in April.

The UK economy is gradually opening up again after the strict coronavirus lockdowns put in place in the winter.

May’s inflation data was collected before the English government loosened restrictions further in the middle of the month, said Samuel Tombs, chief UK economist at Pantheon Macroeconomics. That means “we likely will see a further, broader-based recovery in services inflation in June’s data.”

He added: “Looking ahead, we expect [consumer price index] inflation to peak at about 2.8% towards the end of this year.”

Such a rise would be well above the Bank of England’s 2% target, potentially putting pressure on the central bank to pull back on its support for the economy.

However, like the Federal Reserve in the US and European Central Bank in the eurozone, the BoE thinks strong rises in inflation will be a temporary feature of the reopening of economies.

Hannah Audino, economist at PwC, said: “We expect the Bank of England to see through the recent rise in inflation and continue to prioritize supporting the recovery with low interest rates, over reducing inflation.”

“It is important to interpret the latest data in the context of the low prices we saw 12 months ago during the pandemic,” Audino said. “This means that so-called ‘base effects’ are driving up the rate of inflation, and will likely do so for a few more months.”

Willem Sels, chief investment officer at HSBC’s private bank, said: “Although UK CPI may now further overshoot the Bank of England’s 2% target, we still think it will come down again to around 2% in 2022.”

Signs that inflationary pressures are building came in the latest readings on UK producer price inflation, also released Wednesday. Prices of manufactured goods increased by 4.6% in May year-on-year, compared with 4% in April, the ONS said. Meanwhile, costs for UK producers jumped 10.7%, the highest rate of growth for input prices since September 2011.

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