finance

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


UK inflation updates

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

The unexpected surge will undermine the central bank’s view that price rises are manageable and temporary, with more likely this autumn in a serious squeeze on living standards.

With CPI inflation more than 1 percentage point above the BoE’s 2 per cent 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 back to target.

The annual rate rose from 2 per cent in July to 3.2 per cent in August. Some of the increase reflected coronavirus schemes last summer, such as eat out to help out, which lowered prices temporarily.

But UK prices have increased 2.7 per cent in the past six months alone, highlighting that most of the rise in inflation this year reflects higher charges for goods and services since Covid-19 restrictions began to be lifted after the winter wave of the virus.

In August alone the monthly rise in food, transport, recreation, furniture and restaurant prices was more than 1 per cent.

Line chart of CPI inflation YoY (%) showing UK prices rose in August at their fastest annual rate since 2012

With the BoE already expecting inflation to rise to 4 per cent by the end of the year, the rapid acceleration will come as a shock. It follows strong labour market data on Tuesday, suggesting the economy is running hotter than many economists thought.

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Gas and electricity bills are set to increase sharply this autumn reflecting rises in wholesale prices, while value added tax will rise back to 12.5 per cent for the hospitality at the end of this month and food and clothing prices are also expected to jump in the autumn.

But economists are split on whether inflation will become a significant problem in the months ahead or disappear after largely one-off price rises as the economy opens up after the Covid shock.

Yael Selfin, chief economist at KPMG UK, said the rise in inflation was likely to be a sign of things to come. “While inflation may ease slightly in September, it is expected to remain elevated,” she said. “Recruitment difficulties, cost pressures for businesses, supply chain issues and structural changes post-Covid are all pointing to higher inflation until at least the end of this year.”

Hussain Mehdi, a macro strategist, at HSBC Asset Management, warned the central bank not to be complacent about price rises because some elements of the data are clearly temporary. “As we head into 2022, evidence of more persistent supply-demand imbalances and rising wage pressures could translate to stickier inflation and a more hawkish policy stance — with the MPC potentially pushing the button on rate hikes as early as May,” he said.

The BoE’s Monetary Policy Committee is likely to be as divided as the economic community with other economists rigidly sticking to their view that inflation will fall back to the 2 per cent target quickly next year.

Paul Dales, chief UK economist at Capital Economics, said a rise in inflation above 4 per cent later this year “was in the bag” and he expected it to reach 4.5 per cent, but this would not last. “Inflation will fall sharply next year as a lot of these upward influences unwind,” he said, predicting a slower recovery would delay and interest rate rise well into 2023.

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Samuel Tombs, UK economist at Pantheon Macroeconomics, blamed the 18.3 per cent inflation rate in used car prices. He said that apart from a few specific goods where prices were rising fast, there was “little near-term momentum in the rest of the core [inflation] basket”.

Market reaction to the data was muted. UK government bonds came under mild selling pressure on Wednesday morning, pushing the yield on the 10-year gilt up 0.02 percentage points to 0.76 per cent. Sterling rose 0.2 per cent against the US dollar to $1.3832. 

Additional reporting by Adam Samson



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