Interest rate fears as inflation jumps past Bank of England target: reaction

Inflation has jumped above the Bank of England’s target after a surge in fuel prices and more expensive clothing, raising the spectre of higher interest rates.

The Office for National Statistics (ONS) said the consumer prices index (CPI) measure of inflation hit an annual rate of 2.1 per cent in May, ahead of the central bank’s 2 per cent target. It marks an increase on the 1.5 per cent reported by the ONS for April.

The latest reading was ahead of the expectations of analysts, who had forecast a 1.8 per cent rate for last month.

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Last week, the Bank of England’s chief economist, Andy Haldane, said a rise in inflation above the central bank’s target must be only temporary, and that long-term levels of high inflation need to be “avoided at all costs”.

May’s rise in inflation was led by fuel prices. Picture: Rui Vieira/PA
May’s rise in inflation was led by fuel prices. Picture: Rui Vieira/PA

Steven Cameron, pensions director at Aegon UK, said: “There are strong indications from other economies that inflation will continue to rise sharply, as seen in the US where consumer prices rose to their highest rate since 2008.

“There is a concern that if consumers spend as hard as they saved in lockdown this will create inflationary pressures that pushes rates well beyond anything consumers have had to deal with in recent years or for many in living memory.”

Derrick Dunne, chief executive of Beaufort Investment, noted: “Today’s data once again indicates a promising rise in consumer demand, largely driven by the easing of restrictions and a hearty embrace of the return to hospitality: the strongest upward contributions in May came from transport, clothing, food and recreation.

“But the Bank of England may soon have to take tightening measures. Let’s not forget a few years ago when it started cautiously raising the base rate in the face of a post-Brexit inflation surge.”

ONS chief economist Grant Fitzner said: “The rate of inflation rose again in May and is now above 2 per cent 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, thanks to rising crude prices.

“Clothing prices also added upward pressure as the amount of discounting fell in May.”

Clothing prices increased by 2.3 per cent, the biggest rise since 2018, as retailers significantly reduced their discounting a month after welcoming customers back into stores. This inflation was only partly offset by a negative impact from cheaper food and drink prices.

Bread, cereals and meat prices all dipped after seeing significant rises a year earlier.

The retail price index (RPI), a separate measure of inflation, increased to 3.3 per cent from 2.9 per cent in April.

The CPI including owner-occupiers’ housing costs (CPIH) – the ONS’s preferred measure of inflation – was 2.1 per cent in May, up from 1.6 per cent in April.

Hannah Audino, economist at PwC, said: “Inflation is unlikely to follow a smooth path this year, with many different factors feeding irregularly into the monthly data. In general, inflation is likely to follow an upwards trend as the economy reopens.”

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