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.

Read the original article on Business Insider