Inflation rises and could spiral in 2021 amid 'huge pent-up spending demand'

Inflation increased last month on the back of higher food prices and more expensive household goods and could rise quickly this year due to pent-up spending demand.

Food and non-alcoholic drink prices increased by 0.6 per cent according to the latest inflation statistics. Picture: Greg Macvean
Food and non-alcoholic drink prices increased by 0.6 per cent according to the latest inflation statistics. Picture: Greg Macvean

The Office for National Statistics (ONS) said the consumer prices index (CPI) measure of inflation increased to 0.7 per cent in January from 0.6 per cent a month earlier.

The figure was ahead of expectations, with a consensus of economists having predicted inflation of just 0.5 per cent for the month.

Jonathan Athow, deputy national statistician for economic statistics at the ONS, said: “Inflation rose slightly in January, with food prices increasing.

“Household goods also pushed up prices with less discounting this year on items such as bedding and settees.”

Food and non-alcoholic drink prices increased by 0.6 per cent, driven particularly by more expensive cauliflowers and potato crisps.

The ONS also flagged that there was volatility in fish prices following the UK’s exit from the EU, with price increases for prawns, frozen fish fingers and fresh salmon.

Kevin Brown, savings specialist at Scottish Friendly, said: “We are yet to see the true impact of inflation of a vast increase in supply of money to UK households over the past 12 months. Money held by households as physical cash and in bank accounts increased by £120 billion between February and November 2020 to £1.6 trillion.

“Until now, all this extra money sloshing around the economy has not impacted prices because of limitations on consumer spending. But there is now huge pent-up spending demand among certain quarters of the population and that will quickly be released as soon as lockdown restrictions are lifted.

“Over the course of 2021 we are therefore likely to see inflation rise above and possibly well beyond the Bank of England’s 2 per cent target.”

Ed Monk, associate director at Fidelity International, said: “The small rise in headline inflation reflects a pretty confusing picture for prices right now.

“The trend, however, is for gently rising prices and the forecast from the Bank of England of hitting 2 per cent inflation in early 2022 is still feasible.

“The next few months may see extra upward pressure from motor fuels in particular, as price falls from last spring fall out of the year-on-year comparisons. The release of pent up demand as households have more freedom to spend may add to the momentum.”

The ONS said the largest contribution to the increase in CPI inflation last month came from furniture and home furnishings, as the sector saw significantly reduced discounting on leather settees and double beds.

These increases were partially offset by cheaper clothing as retailers heavily discounted items online.

The retail price index (RPI), a separate measure of inflation, increased to 1.4 per cent from 0.9 per cent in December.

The CPI, including owner-occupiers’ housing costs (CPIH) – the ONS’s preferred measure of inflation – was 0.9 per cent in January, up from 0.8 per cent in December.

Laith Khalaf, financial analyst at AJ Bell, said: “While the headline CPI rate is glacially cool, the debate between inflation and deflation is raging.

“Commodity prices have been creeping up, and the market seems to be buying into a global economic recovery, with cyclical stocks performing well.”

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