UK inflation rose by 2.1 per cent last month, ahead of expectations and overshooting the Bank of England’s target of 2 per cent.
The consumer prices index including owner occupier’s housing costs (CPIH), measured in the year to May, was driven by the continued re-opening of the economy after lockdown, with prices of clothes, meals and fuel all rising.
Inflation is one of the main factors that the BoE's Monetary Policy Committee considers when setting the interest rate and monetary policy is set to achieve the government's target of keeping inflation at 2 per cent.
But many believe the current surge in inflation is transitory and should not influence policy at this stage.
On May 6, the BoE said as rise in spending could see inflation reach 2.5 per cent towards the end of this year, but that there wouldn’t be any long-term impact and inflation would drop back to 2 per cent in the medium term.
Willem Sels, chief investment officer at HSBC private banking and wealth management, said although UK CPI may further overshoot the BoE’s target, he thinks it will come down to around 2 per cent in 2022.
“There is significant spare capacity in labour markets, with more than two million UK workers remaining on furlough, meaning it is unlikely that a wage spiral develops, and hence CPI pressures should be temporary,” he said.
“This means there is no urgency for the Bank of England to hike interest rates any time soon.”
Jonathan Letham, head of IMX at Nucleus, said central bankers in the US, UK and Europe indicated they would maintain loose monetary policy to support economic recovery.
“The fear for investors is that the central banks' stimulus combined with economies reopening could lead to prices spiralling higher and hurt real returns over the longer-term,” he said.
“However, with people out spending for the first time after a sustained lock down period, a rise in global inflation is to be expected.
"The inflation spikes we are observing are likely a transitionary phase driven by pent up demand and supply chain issues as economies begin to re-open."
Paul Craig, portfolio manager at Quilter Investors, said investors should not be concerned but should be alert: “The data we are getting continues to be noisy and won’t return to normal for some time. Therefore, don’t be surprised to see things run hot for a period while the BoE assesses the impact.
"For investors they will need to keep listening closely to the noises coming out of the central banks because as soon as they hint at moving, markets will react quickly.
"This is why investing in quality businesses is so crucial right now. They are built to withstand multiple market environments and won’t necessarily be phased by spiking inflation and the impacts it could have on central bank decisions.”
Jason Hollands, managing director of Bestinvest, said investors should consider how their portfolios are prepared for inflation.