UK inflation jumped to 2.1% in the year to May
As the UK economy opened up – consumer spending increased. The Consumer Prices Index (PCI) measure of inflation climbed from 1.5% in April, according to the Office for National Statistics (ONS), driven by the rising cost of clothes, fuel, food and drink.
Inflation vs interest rates
Inflation is now at its highest reading since before the pandemic, and this will place the possibility of interest rate hikes back on the agenda.
Above Bank of England’s 2% target
May’s reading was above most economists’ forecasts for an increase of about 1.8%, and means inflation is now above the Bank of England’s 2% target.
The ONS chief economist, Grant Fitzner is reported to have said: ‘The rate of inflation rose again in May and is now above 2% for the first time since the summer of 2019.’
‘This month’s rise was led by fuel prices, which fell this time last year but have jumped this year, due to rising crude oil prices. Clothing costs also added upward pressure as the amount of discounting fell in May.’
Surprise inflation increase?
The increase in inflation was due to consumers pouring back to the shops in a pent up post lock down shopping frenzy after coronavirus restrictions eased.
Consumers have spare money and they want to spend it. So all the savings built up through lockdown from furlough and other employment protection schemes has been set free!
Now that the UK public are allowed out again – spending is on the agenda and so we are seeing a fast movement in consumer spending affecting on prices again, especially on the high street.
Inflation pressure = interest rate increase?
If inflation pressure was sustained into next year we likely will see interest rate increases. But the Bank of England and the U.S. Federal Reserve do not appear to be in any hurry to raise rates. Through the financial crises interest rate remained low and are even lower now. Where will the economic recovery need to be before interest rates are increased?
We are not alone
Inflation is not only on the rise in the UK – the U.S. consumer prices hit 5% in May, the highest in almost 13 years. Interest pressure is builing in the U.S too but the Fed Reserve suggest it is transitory. Some investors believe this is the case but many do not.
It is inevitable that interest rates will increase, but the timing will be critical.
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