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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Global shares ease after US jobs data cools some economic optimism; oil retreats from 2-year highs

A now hiring sign seen outside of the Vintage Knolls retirement and assisted living community.
A now hiring sign seen outside of the Vintage Knolls retirement and assisted living community.

  • US stock futures dipped as investors weighed up last week’s employment report ahead of inflation data this week.
  • Oil pulled back from two-year highs, under pressure from concern about an influx of Iranian supply
  • Natural resources stocks were among the biggest losers in Europe, despite strong Chinese commodity imports.
  • See more stories on Insider’s business page.

Global shares eased on Monday, as investors digested a slightly disappointing read of the US labor market and prepared for key inflation data later this week, while oil pulled back from two-year highs.

Friday’s employment report showed the US economy created 559,000 jobs in May, below the 650,000 economists had expected, while April’s number was revised up marginally to 278,000.

The report didn’t offer traders the confirmation they had hoped for of a robust recovery in hiring. At the same time, it dampened the prospect that the Federal Reserve might have to quickly rein in some of its support for the economy, which allowed stocks to end last week on a positive note.

Futures on the S&P 500, Nasdaq 100 and Dow Jones fell between 0.1 and 0.3%, indicating a slightly softer start to trade later on.

“What the May jobs report does tell us is that despite the high levels of vacancies being reported, there is a reluctance on the part of US workers to return to work,” CMC Markets chief strategist Michael Hewson said.

“This flies in the face of optimism that the economic reopening would prompt a rehiring blitz, making it much less likely that the Fed will look at an early tapering of asset purchases,” he said.

Treasury Secretary Janet Yellen told Bloomberg in an interview on Sunday that if the US economy ended up with slightly higher rates and inflation, this would be “a plus”.

“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” she told Bloomberg.

The next major data point will be US consumer inflation on Thursday, which is expected to show prices accelerated by 4.7% in May, following April’s 4.2% increase.

The Fed has repeatedly said it is willing to tolerate a sharper rise in consumer prices, which it believes will be short-lived. But investors are highly sensitive to any hint from economic data that might suggest an abrupt change in course by the central bank.

The dollar index was up 0.2% on the day, buoyed largely by gains versus sterling and the euro, which were both down by around 0.1% against the greenback. Yields on the 10-year Treasury note, which can act as a gauge of investor confidence, rose 2 basis points to 1.577%, indicating a degree of caution.

Overnight in Asia, Chinese trade data showed the country’s imports rose at their fastest rate in a decade. The world’s biggest commodity consumer overlooked higher raw material prices, although its crude intake slowed and exports undershot expectations. This had little impact on the major indices. The Shanghai Composite ended up 0.2%, while Tokyo’s Nikkei rose 0.3% and Seoul’s KOSPI closed 0.2% higher.

“What is clear is that the value of both imports and exports is a major contributor due to sky-rocketing raw materials prices, and that in volume terms, the evidence for a commodity supercycle emerging is thus far wholly unconvincing,” Marc Ostwald, chief global economist for ADM Investor Services, said.

Oil prices pulled back from last week’s two-year highs after the Chinese trade data, as traders weighed up the market’s ability to absorb a potential supply increase from Iran, which is in talks with global powers over its nuclear activity. Overall, demand is expected to accelerate over the course of the year, although outbreaks of COVID-19 in the likes of India have tempered some of the optimism.

Brent crude futures were last down 0.8% at $71.34 a barrel, having touched a high of $72.17 last week, while WTI futures were down 0.7% at $69.12 a barrel.

Turning to Europe, gains in the benchmark indices were restricted by declines in the mining and resources sector. Shares in Anglo American fell nearly 3%, while copper producer Fresnillo dropped 1.9%, and commodity trader Glencore lost 1.6%. French oil major Total shed 1.3%, making it one of the biggest losers on the STOXX 50 index, which slipped 0.1%. London’s FTSE 100 edged up 0.1%. Meanwhile, the mid-cap FTSE 250 rose 0.2%, shrugging off a 15% loss in the shares of office-space provider IWG, which dropped 15% after the company issued a profit warning for 2021.

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The FTSE 100 had a stellar first week of 2021, beating US and European stocks. Is this the year it finally outperforms?

The FTSE 100 had a tough 2020, but optimism has risen in the City.

  • The FTSE 100 rose more than 6% last week, far outstripping the US’s S&P 500 and Germany’s Dax. 
  • The UK’s main index has been boosted by coronavirus vaccines, the Brexit trade deal, and expectations of Democratic stimulus in the US.
  • But the lack of a financial services Brexit deal and worries about the UK economy could hold back British stocks.
  • Visit Business Insider’s homepage for more stories.

The FTSE 100 roared ahead in the first week of 2021, jumping more than 6% compared to increases of roughly 0.13% on the US’s S&P 500 and 1% on Germany’s Dax.

A number of factors have driven the FTSE higher: the signing of a post-Brexit trade deal with the EU; the approval and rollout of coronavirus vaccines; and the Democrat victories in the Georgia Senate runoff elections in the US.

Each of these promise to aid an economic recovery in 2021 that will help the industrial, financial, and energy firms that make up much of the UK’s blue-chip index, and which suffered so much under the coronavirus pandemic in 2020.

But the FTSE is still well behind its peers when looked at over the last year. Whereas the S&P 500 is around 17% higher than it was a year ago and the Dax is up about 5.5%, the FTSE 100 is down roughly 9.5%.

The question investors – from amateur traders to the biggest institutions – are asking themselves is whether the FTSE can continue its winning streak and finally make them money.

FTSE 100 investors look past short-term gloom

The UK economy is in a bad place. A new, more infectious strain of coronavirus has caused cases to soar, forcing the government to bring in tough restrictions. Goldman Sachs now expects the UK to enter another recession in the first quarter.

Should the situation worsen, investors may take notice. Yet for now, they are looking past short-term worries towards what they hope will be a strong expansion later in the year.

In particular, the UK’s rapid approval and rollout of the Pfizer/BioNTech and Oxford/AstraZeneca vaccines has lifted investor confidence since December.

“Our view is that 2021 will be about reflation created by global supply constraints and a successful rollout of COVID-19 vaccines,” Saxo Bank’s head of equity strategy Peter Garnry told Insider.

A return to normality, growth and inflation via vaccines “is positive for interest rates and commodities which benefits banks and resource companies,” Garnry said.

The FTSE 100 is chock-full of such companies. Miners Glencore, Anglo American and Rio Tinto all rose more than 13% last week. HSBC and Standard Chartered rose more than 8%.

Another element of the story is that the FTSE 100’s laggard status has made it attractive. Neil Wilson, chief market analyst at trading platform, told Insider: “You look at the Dax, it’s at an all-time high. Euro Stoxx, all-time high … The only one that’s cheap with some value left in it is the FTSE.”

Brexit could pose a threat

The eventual end to the long-running Brexit saga has also boosted UK equities, with a trade deal removing the threat of a no-deal outcome that so worried markets.

Yet, the UK has still unmoored itself from its biggest trading partner and the deal does next to nothing for financial services. Despite the short-term relief of a trade deal, some analysts say Brexit is still a threat to the FTSE 100.

“Banking stocks have given up some of their pre-Christmas gains as those worries about the potential long term impact leaving the EU will have on financial services filter through,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, told Insider.

NatWest is down around 3% this week, for example, while Lloyds has fallen roughly 1.5%.

Prime minister Boris Johnson has hailed his Brexit deal, but it does little for financial services firms

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said in a note: “We doubt that 2021 will be the year that UK stocks finally outperform.” Many UK stocks are still less attractive than high-flying growth stocks such as the tech giants of the US, he said.

Tombs also cited worries about financial services, and stressed that the deal “has reduced, but not eliminated trade uncertainties.”

Reflation trade suits the FTSE 100

Yet FTSE 100 investors are in a jubilant mood. A key part of this story is Joe Biden’s victory in the US presidential election and the Democratic party’s wins in Georgia, which will give them control of the Senate.

Expectations of extra stimulus under the Democrats have caused bond yields to rise as investors anticipate more issuance from the government and stronger growth and inflation.

The rise in yields – the US 10-year Treasury yield, which moves inversely to price, has climbed above 1% – has helped banks, which benefit from higher interest rates and hold lots of bonds. It has also boosted so-called value stocks, as investors cool slightly on the growth stocks that looked so attractive when yields were low.

Garnry says: “Our view is that the FTSE 100 will do well this year, but because of external factors mentioned above and not the domestic situation which is still gloomy for the UK.”

Wilson says: “There are loads of risks. There could be tax hikes in America, more regulation, [and] you’ve got the risk the vaccines don’t really work in spurring the economic recovery.”

“But I just think there’s just so much money coming, there’s so much stimulus, there’s so much support.”

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