Inflation Surges to a Worrying 2.1% as Bank of England Target of 2% is Breached
In the 12 months running up to May 2021, there has been a Consumer Price Index inflation rise of a whopping 2.1%, according to the statistics provided by the ONS. The Bank of England’s target of 2% has therefore been breached, leaving speculation as to how the bank’s MPC (Monetary Policy Committee) will react. It is thought that a monetary policy adjustment will be needed, and it is expected that interest rates will rise.
When compared to May 2020, last month showed a CPI rise of 0.6% when compared to last year, which showed little to no change.
CPIH (including owner-occupancy housing costs) also showed a monthly increase of 0.5%, growing from 1.6% in April to 2.1% in May.
Of the largest contributors to the rise, the increased cost of fuel, clothing, recreation, and eating and drinking out has had a detrimental effect on CPIH 12-month inflation rates from April to May.
Associate Investment Director at Killick & Co., Rachel Winter, stated:
“The jump in UK inflation signals the hustle and bustle of life once more. Although the government is not progressing with the roadmap as previously promised, a clear vision of the country coming out of lockdown has boosted consumer confidence. Inflation has been driven by the rising cost of clothes, fuel, food, and drink.”
“With the United States exceeding inflation expectations as its consumer price index reached the highest levels since 2008, it will be critical to keep an eye on inflation here. Gradual inflation is beneficial, but having too much of a good thing too soon is not. If inflation becomes unmanageable, the Bank of England may be forced to raise interest rates much sooner than anticipated.”
Portfolio manager at Quilter Investors, Paul Craig, added:
“Inflation is on the up, breaching the Bank of England’s 2% target, yet it remains hesitant to respond by reducing the stimulus it has provided and the quantitative easing that has become so addictive for markets. For now, this is likely the correct decision, as we still expect much of the inflation feeding through to be transitory. Wage increases do appear to be coming through, but again, this data is so distorted by the furlough scheme that it can’t be seen as a reliable indicator.”
“Unfortunately, much of the inflation that is coming through is bad inflation, hitting lower-income households in the pocket. How long these price rises continue remains to be seen. Will inflationary pressures be self-defeating or resolved as pent-up demand dissipates or is met with increasing supply? But should it become sustained, then it risks making the recovery even more uneven than it already is, and thus, it will ultimately fall to the government to pull the fiscal levers as it continues its levelling-up agenda.”
“The data we are getting continues to be noisy and won’t return to normal for some time. Therefore, don’t be surprised to see things run hot for a period while the Bank of England assesses the impact. Investors will need to keep listening closely to the noises coming out of the central banks because, as soon as they hint at moving, markets will react quickly. This is why investing in quality businesses is so crucial right now. They are built to withstand multiple market environments and won’t necessarily be phased by spiking inflation and the impacts it could have on central bank decisions.”
Derrick Dunne, CEO of Beaufort Investment, commented:
“UK inflation continued its ominous climb in May, with the CPI reading surging year-on-year to 2.1%, up from 1.5% in April, beating analyst expectations and, crucially, breaching the Bank of England’s 2% target for the first time since 2018.”
“Clearly, an impressive economic recovery is coming. 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.”
“That being said, the latest delay to our so-called ‘Freedom Day’ and the impending end of the furlough scheme should temper price rises in the short term, but the breach of the Bank’s stringent 2% target may already be provoking discussion of a monetary policy adjustment. Investors should still ensure that their plans can withstand both inflationary pressures and a potential rise in the base rate. At this stage, nothing is off the table.”