Inflation doubles in April

Inflation is rising in the United Kingston as the post lockdown spending splurge starts.

In fact, Britain’s inflation rate doubled in April, marking the beginning of a surge in prices that will fuel speculation about when the Bank of England (BOE) could start taking its foot off the stimulus pedal. Consumer prices rose 1.5 per cent from a year earlier last month after a 0.7 per cent gain in March, the Office for National Statistics reported today (May 19).

This out-turn is in line with the expectations put forward by the country’s leading economists. The April figures were mainly driven by a jump in domestic energy prices and clothing.

However, with the UK’s re-opening allowing consumers to start splurging cash, the BOE expects inflation to exceed its two per cent target later this year. While the UK’s Central Bank sees the price gains as temporary, investors are betting that the UK’s recovery – and the accompanying inflationary pressures – will force policy makers to raise interest rates next year.

This is much sooner than what most economists expect. Market-based inflation expectations are now at their highest since 2008.

The so-called 10-year breakeven rate – a gauge derived from the difference between conventional gilt yields and those linked to retail-price inflation – has risen more than 50 basis points this year.

Details of the movement in price

The data released today showed price increases in the following areas:

• Gas and electricity prices surged nine per cent in the month, driving the higher inflation reading
• Motor fuel also gained in the month after crude oil increased
• Clothing and footwear prices rose 2.4 per cent in the most recent report after a 1.6 per cent drop a year ago
• A measure of input prices paid for raw materials by factories rose 9.9 per cent from a year earlier, the fastest rate since February 2017
• Metals and non-metallic minerals provided the largest contribution to the increase.

Andy Haldane, the BOE’s outgoing chief economist, dissented in an 8-1 vote this month to keep the central bank’s stimulus programme unchanged. He argued that the momentum behind the recovery is strong enough to risk a damaging wave of inflation.

“Experience during the 1970s and 1980s demonstrates that, once out of the bottle, the inflation genie is notoriously difficult to get back in,” Haldane wrote in the Daily Mail newspaper last week. Concerns about inflation are mounting globally. In the US, consumer prices climbed in April by the most since 2009, though Federal Reserve officials view the pickup as temporary and have signaled their intent to maintain ultra-easy policy.

The BOE is signaling it will tolerate an increase in inflation and that it doesn’t intend to move until there’s a more sustained pickup in prices. The UK faced major bouts of inflation in the 1970s and 1980s, but the BOE has overlooked more recent increases that it judged were temporary.

Prices surged close to five per cent, both in 2008 and 2011, fueled by a drop in the value of the pound that pushed up import prices. In both cases, the BOE stuck with its stimulus to support the economy after the financial crisis.

“We’re very vigilant to any sense that inflation expectations would de-anchor,” BOE Deputy Governor Dave Ramsden told lawmakers yesterday.