UK inflation rate more than doubles in April

The annual UK inflation rate more than doubled in April, as a rise in energy and clothing costs drove prices higher.

The jump to 1.5% in April from 0.7% in March, means consumer prices are rising at their fastest rate since March 2020 at the outset of the pandemic.

The difference was mainly due to price rises this year compared with falls at the beginning of the pandemic, the Office for National Statistics said.

A rise in the price of oil had also led to higher petrol prices, it added.

Petrol prices were now at their highest level since January 2020, the ONS said.

Hannah Audino, economist at PwC, said the sharp rise largely reflected an increase in prices from their low levels a year ago at the start of the pandemic.

She said she expected inflation to continue to rise as lockdown restrictions eased and the economy continued to reopen “allowing consumers to unleash some of their excess savings”.

“Recent survey evidence suggests that the share of households who plan to spend some of their savings has increased in recent months, as the vaccine rollout boosts confidence,” she added.

CPI inflation chart

Laith Khalaf, a financial analyst at AJ Bell, said that the rise in prices was “in key areas where it’s hard for consumers to control spending, namely transport, clothing, and household energy”.

“At current levels, inflation is nothing to fret about, but there is rising concern that the fiscal and monetary response to the pandemic has sown the seeds of an inflationary scare further down the road,” he said.

He said the Bank of England has made it clear it will tolerate inflation above its 2% target without “pulling the trigger” on interest rate rises.

“However, if inflation looks like it’s going to get a significant foothold, markets will take matters into their own hands and raise borrowing costs across the economy,” he said.

Inflation contributory factors chart

Two weeks ago the Bank of England said that UK inflation is heading above its 2% target and it expected it to hit 2.5% at the end of 2021.

That is due to a rise in global oil prices and the expiry in September of covid emergency cuts to value added tax (VAT) in the hospitality sector, as well as comparisons with the pandemic slump of 2020.

The Bank thinks inflation will then slip back to 2% in 2022 and 2023.

Bank of England governor Andrew Bailey said on Tuesday that so far there was no strong evidence that higher prices paid by manufacturers were feeding through to consumer prices.

However, he said the Bank “will be watching this extremely carefully” and would take action if necessary.

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Lockdowns are deflationary; because they forcibly stop us shopping, travelling and mixing they reduce demand for everything from consumer goods and energy.

So a return to more normal levels of inflation was always likely as the global economy slowly started to re-open.

Clothes prices, for example, contributed to the rising cost of living not because they were rising by much but because they were no longer falling.

What’s spooked markets recently is the risk of inflation coming down the pipeline.

In a literal sense it already is: the price of oil has been rising in anticipation of a global recovery, pushing up petrol and household bills.

Last week, markets took a knock fearing that the rising cost of raw materials would force the Bank of England to raise interest rates from their rock bottom official level of 0.1% sooner than anticipated to stop inflation getting out of control.

The Bank of England Governor Andrew Bailey has twice spoken publicly to play down that anxiety, saying on Tuesday that he had not yet seen strong evidence of those rising costs being passed through to consumers.

But Wednesday’s figures for what manufacturers are paying for raw materials show a rise in input prices – what manufacturers pay for raw materials – of 9.9%.

That’s the fastest rise in four years and faster than most economists expected.

Source: BBC