Inflation overshot the Bank of England's 2 per cent target for the second month running in June, as it was up 2.5 per cent in a year.
The central bank’s target, which was also overshot in May, was superseded once again by climbing prices in food, clothing and motor fuel, recovering the value they lost in 2020.
On a monthly basis, the Consumer Prices Index (CPI) rose by 0.5 per cent in June 2021, compared to a 0.1 per cent rise in June 2020.
Richard Carter, head of fixed interest research at Quilter Cheviot, said despite breaching the central bank’s target it was still “likely that this bout of inflation won’t be sustained over the long-term”.
Carter said: “The price increases in the UK are being driven by the sectors that struggled since the start of the pandemic.
"Most of these sectors registered negative price growth for many months in 2020 so it’s only natural that prices rise as demand returns.
“The Bank of England will expect this bout of price increases to be transitionary, and one that will likely resolve itself over the next six months as the economy re-opens.”
But he added: “If higher prices seep into the labour market on a sustained basis due to labour shortages, we could see sustained inflationary pressures.
“Likewise, if inflation expectations become ingrained among consumers and producers, this could spell trouble. It is in this situation that the Bank of England will be compelled to act swiftly to remove the inflationary pressures.”
Oliver Blackbourn, a multi-asset portfolio manager at Janus Henderson Investors, agreed that with services prices now running at over 2 per cent, like other goods this could feed through into wages “that could herald more sustained price increases”.
But he also pointed out: “Input and output costs tend to lead inflation figures and showed their first pause in what has been a rapid move higher.
"A further moderation in the coming months would provide further evidence to support the central bank message that, at least for the moment, this phase of higher inflation is transitory.”
Wage data is due out tomorrow. Blackbourn said these are “expected to show further strong gains, despite basic salary rises already being the strongest for over two decades”.
The UK’s target-beating inflation rise reflected that of its stateside neighbour. Yesterday (13 June), the US reported a rise for June which was 0.4 per cent higher than the Federal Reserve’s predictions.
“Following on from yesterday’s consumer inflation surprise in the US, on this side of the pond we have a similar shock,” said Charles Hepworth, a director at GAM Investments.
“[This is] the second month in a row that inflation has been above the critical 2 per cent level since 2019.”
Hepworth cited the global semiconductor shortage, which he said was “forcing up the prices” in the second hand car market, as June saw a 4.4 per cent increase in used car prices.
Indeed, the largest upward contribution to the Consumer Prices Index Including Housing Costs (CPIH) came from transport, making up 0.80 percentage points.
The Bank of England expects inflation to keep rising this summer and hit 3 per cent, before dropping back as last year’s lockdown lows finally filter out of its numbers.
Andy Haldane, the central bank’s chief economist who left last month, warned of the danger of inflation hitting as high as 4 per cent.
To stave off inflation risks, Carter recommended investors “hold some sensible hedges” and ensure their portfolios remain diversified.
Not for the the long-term
Whilst many experts have dubbed the UK’s latest inflation rise a “shock”, they have assumed such shocks will be in large part “temporary”.
Hepworth explained: “Three months of rising inflation does not point conclusively to a new regime just yet, but could potentially lead to heated discussions at the Bank of England.”
But Ben Lord, manager of the M&G Inflation Linked Corporate Bond Fund, is not so sure as to discount the potential for longer term inflation patterns.
He said: “It’s still too early to tell whether these higher inflation numbers are part of a more structural increase to inflation...though today’s 2.5 per cent print nudges the balance in favour of that view”.
Lord cited two answers the economy needs before any certainty can be drawn. One is how the service sector continues to unlock, and the second is how the UK’s fiscal response evolves.
“Will it, as Biden has chosen in the US, be a policy of growing into our debt burden? Or will it be austerity,” Lord questioned.
“Until markets get more clarification of what central banks mean by ‘transitory’ and ‘persistent’, they will continue to struggle to predict central banks’ actions.”
'Raining havoc on savers'
Last month, the pound fell 0.5 per cent against the dollar and Euro as the UK’s central bank’s monetary policy committee (MPC) announced it would maintain interest rates at 0.1 per cent.
Echoing Hepworth and Carter’s sentiments, the MPC said they expected the current rising inflation environment to be "transitory".
Unlike the US Federal Reserve, which hinted it could raise rates twice in 2023 - a year earlier than planned.
But despite predictions around the “transitory” nature of UK inflation rises, Rachel Springall, a Finance Expert at Moneyfacts, said inflation was still “raining havoc on savers’ cash”.
She continued: “There is currently not one standard savings account that can outpace its eroding power and, according to the Bank of England, it is expected to pick up further above the target of 2 per cent.”
In recent weeks, Moneyfacts recorded improvements to the UK’s top savings rate deals. Springall explained that a saver who locked into a five-year fixed bond a year ago would be on a lower rate than what they could get today on an equivalent term bond.
“[But] the sad truth despite such positive rate changes is that there are no standard savings accounts that can beat the current level of inflation.”
She continued: “One year ago, inflation sat at 0.60 per cent and there were over 300 savings accounts which could beat this.”
Sarah Coles, a personal finance analyst at Hargreaves Lansdown, shared further calculations on the impact of persistent inflation on savers.
“The average easy access rate is now 0.06 per cent, and the most competitive without restrictions is 0.5 per cent. Even tying your money up for 12 months will earn you a maximum of 1.1 per cent, which is less than half the rate of inflation.”
Myron Jobson, a personal finance campaigner at Interactive Investor, thinks the sustained overshoot of the Bank of England’s 2 per cent target “will put mounting pressure on the central bank’s interest rate committee”.
He added: “Rising inflation continues to be a big problem for savers, chipping away at the purchasing power of their money sat in savings accounts paying a pittance in interest.”
But some think the Bank of England will follow its US counterpart.
Luke Hickmore, Aberdeen Standard Investments’ fixed income investment director, reckons “with the currently hawkish note being struck by the Federal Reserve, the thinking is that rates will rise higher and faster than expected.”
He expects the Bank of England to move first with a possible rise to its base rate in May 2022 of 15 basis points, which would take the rate to 0.25 per cent.
Currently it sits at 0.1 per cent, having dropped from 0.25 per cent in March 2020 to control the economic shock of coronavirus.
ruby.hinchliffe@ft.com
