UK inflation climbs to 3.2% as food and transport costs rise

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UK Inflation Updates

Inflation in the UK in August jumped faster in a month than at any time since the Bank of England gained independence to set interest rates, rising 1.2 percentage points to 3.2%, its highest level since 2012.

The unexpected surge will undermine the central bank’s view that price hikes are manageable and temporary, with more likelihood this fall in a severe squeeze in living standards.

With CPI inflation more than 1 percentage point above the BoE’s 2% target, Andrew Bailey, its governor, will be forced to write a letter to the Chancellor explaining why prices have risen so quickly and what the central bank intends to do to bring inflation down. return to target.

The annual rate fell from 2% in July to 3.2% in August. Part of the increase reflected coronavirus programs last summer, like eating out to help, which temporarily lowered prices.

But UK prices have risen 2.7% in the past six months alone, pointing out that most of the rise in inflation this year reflects rising fees for goods and services since the Covid-19 restrictions began to be lifted after the virus’ winter wave.

In August alone, monthly increases in prices for food, transportation, recreation, furniture and restaurants all rose by more than 1%.

With the BoE already expecting inflation to hit 4% by the end of the year, the rapid acceleration will come as a shock. It follows strong labor market data on Tuesday, suggesting the economy is warmer than many economists thought.

Gas and electricity bills are expected to rise sharply this fall, reflecting higher wholesale prices, while value added tax will rise to 12.5% ​​for hotels at the end of this month and prices in food and clothing should also jump in the fall. .

But economists are divided over whether inflation will become a significant issue in the coming months or subside after largely one-off price hikes as the economy opens up after the Covid shock.

Yael Selfin, chief economist at KPMG UK, said rising inflation was likely a sign of things to come. “Although inflation may slow slightly in September, it is expected to remain high,” she said. “Hiring difficulties, cost pressures for businesses, supply chain issues and post-Covid structural changes all point to higher inflation until at least the end of this year.”

Hussain Mehdi, macro-strategist at HSBC Asset Management, warned the central bank not to indulge in price hikes because some pieces of the data are clearly temporary. “As we head into 2022, evidence of more persistent supply-demand imbalances and mounting wage pressures could translate into stiffer inflation and a more hawkish policy stance – with the MPC potentially pushing the button on rate hikes soon. May, “he said.

The BoE’s monetary policy committee will likely be as divided as the business community, with other economists sticking firmly to their view that inflation will quickly fall back to the 2% target next year.

Paul Dales, UK chief economist at Capital Economics, said a rise in inflation above 4% later this year “was in the bag” and he expected it to hit 4, 5%, but that it would not last. “Inflation will come down sharply next year as much of these upward influences dissipate,” he said, predicting that a slower recovery would delay and interest rates would rise until ‘in 2023.

Samuel Tombs, British economist at Pantheon Macroeconomics, blamed the 18.3 percent inflation rate on used car prices. He said that other than a few specific products where prices were rising rapidly, there was “little short-term momentum in the rest of the core. [inflation] basket”.

The market response to the data has been moderate. UK government bonds came under slight selling pressure on Wednesday morning, pushing the 10-year gilt yield up 0.02 percentage point to 0.76%. The British pound rose 0.2% against the US dollar to $ 1.3832.

Additional reporting by Adam Samson


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