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Rate rise speculation mounts as inflation surges by 2.1%

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CPI inflation rose by 2.1% in the 12 months to May, up from 1.5% to April, according to the latest statistics from the ONS. The sharp rise, which breaches the Bank of England's 2% inflation target, has sparked speculation over whether the Bank's MPC will begin to consider a monetary policy adjustment. On a monthly basis, CPI rose by 0.6% in May 2021, compared with little change in May 2020. CPIH inflation, which includes owner occupiers’ housing costs, also rose by 2.1% in May, up from 1.6% in April, with monthly growth of 0.5%. Rising prices for clothing, motor fuel, recreational goods, and meals and drinks consumed out resulted in the largest upward contributions to the change in the CPIH 12-month inflation rate between April and May.

 UK inflation continued its ominous climb in May, with the CPI reading surging year-on-year to 2.1%, up from 1.5% in April – beating analyst expectations and, crucially, breaching the Bank of England’s 2% target for the first time since 2018.  Clearly, an impressive economic recovery is coming. Today’s data once again indicates a promising rise in consumer demand, largely driven by the easing of restrictions and a hearty embrace of the return to hospitality: the strongest upward contributions in May came from transport, clothing, food and recreation. But the Bank of England may soon have to take tightening measures. Let’s not forget a few years ago when it started cautiously raising the base rate in the face of a post-Brexit inflation surge. That being said, the latest delay to our so-called ‘Freedom Day’ and the impending end of the furlough scheme should temper price rises in the short-term, but the breach of the Bank’s stringent 2% target may already be provoking discussion of a monetary policy adjustment. Investors should still ensure that their plans can withstand both inflationary pressures and a potential rise of the base rate. At this stage, nothing is off the table.

Posted by MMB Finance Swindon on 16 June 2021