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UK inflation up to 1.5%

Duncan & Toplis | 1 June 2021

The annual UK inflation rate more than doubled in April to 1.5%, up from 0.7% in March, but statisticians are warning not to use this as an indicator of the health of the economy.

The rise in inflation means that consumer prices are rising at their fastest rate since March 2020 at the beginning of the pandemic, but the Office for National Statistics (ONS) has explained that this increase is largely reflective of the jump in prices when compared to low levels a year ago.

Normally, when looking at monthly statistics, it is better to focus on longer-term trends rather than monthly statistics which can be more volatile, but this time, the ONS warns that these inflation figures are an exception because of the dramatic short-term movements in the UK economy in April 2020.

Back at the start of lockdown, retail sales were down 18%, goods exports fell 20.6% and monthly GDP dropped a record 18.7% - historic lows which affect the ‘base’ for current growth estimates. Now that the economy is recovering, the 12-month growth rate appears exceptionally large - a phenomenon known as the ‘base effect’.

Instead of focusing on inflation, the ONS recommends looking at how current activity levels compare with February 2020, prior to the pandemic, or to look at movements over recent months and quarters for a more accurate perspective.

The ONS said that higher oil prices have pushed up petrol prices and inflation has climbed as lockdown restrictions were eased and shops reopened on 12 April 2021. The rise in clothing and footwear prices meanwhile, reversed an unusual fall in February. Meanwhile, gas and electricity prices rose sharply after the default tariff cap was increased compared with a cut a year earlier.

The Bank of England has a 2% target for inflation, but it has indicated that it will tolerate inflation above this target without increasing interest rates.

Two weeks ago, The Bank said that UK inflation is expected to hit 2.5% at the end of 2021 due to a rise in global oil prices and the expiry of the temporary cuts to VAT in the hospitality sector, as well as comparisons with the pandemic slump of 2020.

After this, The Bank expects inflation to slip back to 2% in 2022 and 2023.

The governor of the Bank of England, Andrew Bailey has said there is no strong evidence that higher prices paid by manufacturers is feeding through to consumer prices, but it “will be watching this extremely carefully” and would take action if necessary.

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