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UK inflation unexpectedly spiked beyond the Bank of England’s target for the first time in nearly two years, an increase that will add to speculation about when monetary policy could tighten. Consumer prices rose 2.1% from a year earlier, the highest since July 2019, the Office for National Statistics said Wednesday. Economists and the BOE expected an increase of 1.8%. Core inflation jumped to 2%, the highest since August 2018. The rally reflected higher prices for fuel, restaurant meals, clothing and recreational goods as the economy took another step out of the lockdown . The central bank expects inflation to temporarily exceed its 2% target and recede by the end of 2022. The data could embolden economists concerned that higher prices could prove more persistent given the rapid pace of recovery.
“Inflation has risen dramatically in recent months and will continue to rise as the impact of higher commodity prices feeds through the supply chain,” said Jack Leslie, senior economist at the Resolution Foundation. “But UK inflationary pressures are different, and not even as great, as those causing fierce debate in the US.”
Read more: US Consumer Prices Rise 5%, Stoking Inflation Concerns
The immediate market reaction suggested that investors support the BOE’s view that the rise in inflation will be temporary. The pound was up 0.3% against the dollar, and performance on the 10-year benchmark gained a fraction.
What Bloomberg Economics Says …
“We do not expect it to change the central bank’s view that it will ultimately prove temporary. The basic effects of energy prices continued to drive up price gains. The other key influence came from prices that are likely linked to the reopening of the economy. “
– Dan Hanson, Bloomberg Economics. Click to REACT.
Separate figures showed that pressure on pipeline prices continued to mount in May. Producer input prices reflecting the cost to the fuel and raw materials industry rose 10.7% over the past year, their biggest increase in a decade. That is driving up the price of products leaving factory doors at the fastest pace since 2012.
The ONS said the cost of transportation equipment along with metals and non-metallic minerals provided the largest upward contributions to producer price inflation.
“There is a higher level of uncertainty about prices today, with the possibility that inflation will be higher if staff shortages persist, which will trigger stronger wage increases, while cost increases continue to impact consumers” Yael Selfin said. Chief Economist at the accounting firm KPMG UK.
BOE chief economist Andy Haldane, who is stepping down at the end of this month, said last week that wages and costs are already rising and that street inflation is “not far behind.”
His colleague Gertjan Vlieghe says policy makers could raise the benchmark rate next year if the labor market recovers smoothly when government employment subsidies end in September.
Market-based inflation expectations remain close to their highest level since 2008. The so-called 10-year equilibrium rate, an indicator that is derived from the difference between the returns of conventional applications and those linked to the inflation of the market. retail price, has increased more than 50 basis points this year.
Many economies have experienced an acceleration in prices in recent months, although policy makers continue to minimize the risk of a sustained inflation outbreak. In the United States, headline consumer inflation jumped to 5% in May, the highest in more than a decade. Inflation in the euro area stands at 2%, just above the European Central Bank’s target.
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