UK inflation rises sharply to 2.5% in June

Britain’s inflation rate rose to 2.5 per cent in June, far exceeding expectations and adding to pressure on the Bank of England to take the increase in prices more seriously.

The rise was widespread last month, the Office for National Statistics said, challenging the BoE’s view that any increase in inflation above its 2 per cent target would be “transitory”.

The third consecutive month of higher than expected inflation — which has climbed from 0.4 per cent in February — indicates that businesses have responded to the relaxation of coronavirus restrictions with an effort to build profit margins.

Economists had expected the rate of inflation to tick up from 2.1 per cent in May to 2.2 per cent. The ONS said the sharper increase in the consumer price index was broadly-based across most goods and services, with prices jumping 0.5 per cent in the month of June alone.

Jonathan Athow, the ONS deputy national statistician, said: “The rise was widespread, for example coming from price increases for food and for second-hand cars where there are reports of increased demand.”

Measured by the consumer price index, UK inflation was at its highest level in June since August 2018.

With the BoE predicting that inflation would peak at about 3 per cent later in 2021, the rapid rise in prices in the second quarter will be followed by more in the autumn when temporarily low value added tax rates on hospitality are removed.

These increases will put pressure on the BoE’s view that the price surge is temporary.

Paul Dales, chief UK economist at Capital Economics, said that the rise in prices was larger than would happen if they were simply returning to normal after the pandemic. This, he said, “means that genuine price inflation is happening too”.

Inflation was likely to grow towards 4 per cent by the end of the year, Dales added, but also agreed that inflation was likely to moderate in 2022, allowing the BoE to hold tight with exceptionally loose monetary policy through an uncomfortable period.

Second-hand car prices were singled out by the ONS as a driver of inflation this year, as in the US, with buyers seeking used cars as an alternative to new, while car production had been severely hit by the global shortage of semiconductors.

The ONS said some of the price rises had temporary elements, such as the increase in costs at petrol pumps, linked to higher commodity prices and some prices rising back to normal after temporary price cuts during the pandemic.

Although most economists share the view that the BoE will tough out the rise in inflation, James Sproule, chief economist of Handelsbanken in the UK, said the BoE’s Monetary Policy Committee should consider how persistently it had underestimated the rise of inflation this year.

“It is important to remember that as recently as February of this year, inflation was 0.4 per cent on an annual basis and there was talk of negative interest rates — all long gone and forgotten,” Sproule said, adding there was a need for the MPC to take the rise in inflation more seriously.

“At least a start to unwinding of the quantitative easing programme should be considered this autumn and that diversity of opinion on the MPC needs to be preserved,” he added.

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