With the United Kingdom reopens its economy after the multiple Covid-19 induced lockdowns, inflation in the British economy is set to continue to rise after an unexpected rise in May when it hit 2.1 per cent and was above the 2.0 per cent target of the Bank of England.
In April the inflation in the economy was at 1.5 per cent. The sudden jump in May was primarily driven by the comparison of prices in May of 2020 when first tight lockdown was in full force in the country. The jump in inflation was especially large for clothing, motor fuel, games and take-away food.
Analysts and economists on the average had expected the rise to be at 1.8 per cent, according to a Reuters poll.
The economic risks of a sustained rise in inflation are being assessed by investors all around the world. The United States has been in particular focus where there was a 5.0 per cent jump in inflation in May which was the highest almost 13 years. There are some concerns about the rising inflation because the US President Joe Biden’s proposed pandemic stimulus package of $6 trillion.
The speeding up of price growth from 0.3 per cent in November to 2.1 per cent in May was also the fastest that inflation for a six month period for the British economy since the collapse of the sterling after the 2008-09 financial crisis, said Jack Leslie, an economist at the Resolution Foundation think tank. “But UK inflationary pressures are different – and nowhere as near as large – as those causing fierce debate in the U.S.,” Leslie said.
There was little impact on the sterling by the ONS figures on inflation.
With the British economy reopening after its coronavirus lockdowns and with global oil prices rising, the Bank of England expects that inflation will reach as high as 2.5 per cent by the end of this year.
The Office for National Statistics said that there was also a rise in core inflation, which does not include the price of food, energy and other volatile items, to 2.0 per cent in the 12 months to May.
The increase in inflation will be temporary, said BoE Governor Andrew Bailey and most colleagues, who added that the rise in inflation does not require the central bank to scale back its huge stimulus programs. It is expected to leave policy unchanged on June 24 after its latest meeting.
The “most dangerous moment” since 1992 when the government removed sterling from the European Exchange Rate Mechanism, which was a precursor to the euro, was faced by the policy makers of BoE, said Chief Economist Andy Haldane last week.
The latest data however also presented some signals of further price pressure ahead.
In the 12 months to May, the prices paid by manufacturers for their inputs rose by 10.7 per cent which was the highest growth since September 2011. Further, the prices that the manufacturers charged increased by 4.6 per cent which was the highest increase since January 2012.
(Adapted from CNBC.com)