Higher inflation 'set to stay for a while' as petrol hike pushes up prices

Inflation nudged back up last month but remained below expectations as petrol and clothing prices rose, official figures have revealed.

The Office for National Statistics (ONS) said the consumer prices index (CPI) measure of inflation hit an annualised rate of 0.7 per cent in March. That follows a 0.4 per cent reading in February and 0.7 per cent in January.

Inflation had unexpectedly eased in February, in part because of the biggest annual fall in clothing and footwear costs since 2009.

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Discounting, which had been commonplace in February, eased somewhat in March, the ONS said, however it was still unseasonably high.

The rate of inflation increased with petrol prices rising and clothes recovering from the falls seen in February. Picture: Rui Vieira/PA
The rate of inflation increased with petrol prices rising and clothes recovering from the falls seen in February. Picture: Rui Vieira/PA

Jonathan Athow, ONS deputy national statistician for economic statistics, said: “The rate of inflation increased with petrol prices rising and clothes recovering from the falls seen in February. However, food prices fell back on the year, as prices of some staples were lower than at the start of the pandemic.”

The price of petrol hit 123.7 pence per litre in March, up from 119.4 pence per litre a year ago.

Inflation is expected to increase this year, as the UK and other countries around the world emerge from the pandemic. Bank of England forecasts have inflation reaching around 2 per cent by the end of 2021.

Sarah Coles, personal finance analyst at financial services group Hargreaves Lansdown, said: “Inflation has flickered into life after rising petrol prices added fuel to the fire. We can expect more heat through the spring and summer.

“Higher inflation is set to stay for a while. The collapse of the oil price continued further into 2020, hitting a low point in May, so the next couple of months will see higher inflation.

“Meanwhile, the economy is reopening gradually, and supply problems caused by both the pandemic and Brexit are likely to put upwards pressure on prices.”

Several experts said that the increase was unlikely to force the Bank of England to change its base rate, which informs the interest that mortgage borrowers pay.

James Sproule, chief economist at Handelsbanken in the UK, said that prices over the next few months will be compared to the first lockdown when many prices were pushed down.

There is also likely to be what he calls “frictional inflation” over the summer, as supply might struggle to meet high post-lockdown demand, therefore leading to higher prices.

James Smith, developed markets economist at ING, said: “What matters for policymakers, however, is whether this above-target stint lasts into 2022. And unlike the US, where we expect inflation to be relatively sticky above 2 per cent, we think the UK story is likely to be less exciting.

“Partly this is because we think the pent-up demand story may be less pronounced than in the States, linked to the fact that the rise in savings has been more heavily concentrated among high-income earners who tend to have a lower propensity to spend.”

Laith Khalaf, financial analyst at investment firm and brokerage AJ Bell, added: “The spike in inflation is nothing to worry about – yet.”

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