UK inflation jumped again last month, overshooting economists’ forecasts and the Bank of England target, as the reopening from lockdown drove up prices and unsettled expectations of gradual increases this year.
The price of consumer goods rose 2.1 per cent in the year to May, up from 1.5 per cent in April and the highest level since July 2019, according to figures released by the Office for National Statistics on Wednesday. The consensus expectation was 1.8 per cent.
Economists globally are monitoring price rises, with inflation accelerating as national economies open up. In the US, prices increased 5 per cent year on year in May, the fastest rise in almost 13 years.
Central bankers have expressed confidence that such steep rises will be temporary, driven by short-term supply chain bottlenecks, rising commodity prices and pent-up demand. But some, including BoE chief economist Andy Haldane, have warned against complacency over upside inflation risks.
After reaching a four-year low of 0.2 per cent last summer, consumer price inflation had doubled in April. May’s increase, driven in part by large sections of the hospitality industry opening after lockdown, brought inflation more swiftly than expected to the BoE’s 2 per cent target level.
This prompted disagreement among economists over its future path. Most had forecast that inflation would pass 2 per cent much later in the year.
Martin Beck, senior economic adviser to the EY Item Club, said the sharp rise had been driven by short-term factors and so was likely to be temporary. “[We are] sceptical that the May data is a sign that the UK is entering a new era of sustained higher inflation,” he said.
However, Paul Dales, chief UK economist at consultancy Capital Economics, said large price surges following the reopening of the economy suggested inflation would rise “a bit further” this year than the 2.6 per cent he had predicted.
Price increases were likely to fall back as the effect of reopening lessened, he added, but potentially less swiftly than expected. “We’re becoming a bit less confident that [inflation] will spend most of next year below 2 per cent,” he said.
The possibility of inflation continuing above the BoE target may intensify pressure on the central bank to act to curb price rises.
BoE governor Andrew Bailey said last month he would not hesitate to tighten monetary policy, for example by raising interest rates from their current 0.1 per cent, if price rises appeared to be consistently outstripping 2 per cent.
The central bank indicated in May it would curb quantitative easing, which involves the bank buying government bonds to boost the economy, although it said this was an operational matter not prompted by a change in monetary policy.
May’s increase in inflation was driven by significant rises in clothing and footwear, which rose 2.3 per cent between April and May, motor fuel and recreational goods. Eating and drinking in bars, restaurants and pubs, as businesses raised their prices for customers eager to make the most of more relaxed restrictions, also pushed up prices.
These were partially offset by a downward contribution from food and non-alcoholic drinks. Core inflation, which excludes volatile elements such as alcohol, increased from 1.3 per cent to 2 per cent.
Inflation is likely to increase further over the coming months as cuts to value added tax for the hospitality sector, which have kept prices in restaurants and pubs lower than they otherwise would have been, are reversed in September.