UK inflation rate rose sharply to 2.5% in June

The inflation rate in the UK rose to 2.5% in June, far exceeding expectations, increasing the pressure on the Bank of England and requiring it to pay more attention to rising prices.

The Office of National Statistics said that the general price increase last month has challenged the Bank of England’s view that any increase in inflation above its 2% target will be “temporary”.

The inflation rate was higher than expected for the third consecutive month — climbing from an annual growth rate of only 0.4% in February — indicating that companies have responded to the relaxation of coronavirus restrictions in an effort to build profit margins.

Inflation in the UK is rising much faster than expected, which reflects a similar pattern in the US, where Official data show This week, its consumer price index rose at an annual rate of 5.4% in June.

As traders moved forward their expectations for the first interest rate hike from mid-2023 to the end of 2022, the pound rose slightly on the news.

Economists had expected the inflation rate to rise to 2.2% from 2.1% in May.

Jonathan Athow, deputy national statistician at the National Bureau of Statistics of the United Kingdom, said: “The increase is common, for example from rising food and used car prices, and reportedly increased demand.”

Measured by the consumer price index, UK inflation in June was at its highest level since August 2018.

The Bank of England predicts that inflation will reach a peak of around 3% later in 2021, and the rapid rise in prices in the second quarter indicates that the peak will be even higher. After canceling the temporarily lowered hotel value-added tax rate, inflation may surge again in the fall due to rising natural gas and electricity prices and rising restaurant prices.

Capital Economics’ chief British economist Paul Dales questioned the Bank of England’s view that rising prices are just one example of price cuts during a pandemic reversal. He said that as price increases continue and become widely apparent, the data shows that “real price inflation is also happening.”

Dales added that inflation may increase to 4% by the end of this year, but he also agrees that inflation may slow in 2022, which allows the Bank of England to keep tightening during a disturbing period and adopt an unusually loose currency. policy.

Used car prices are listed by the UK’s National Bureau of Statistics as a driving factor for this year’s inflation. Just like in the United States, buyers seek used cars as a substitute for new cars, and car production has been hit hard. Global semiconductor shortage.

The National Bureau of Statistics of the United Kingdom said that some price increases have temporary factors, such as the increase in gas station costs related to the increase in oil prices, and some price increases after temporary price cuts during the pandemic.

Although most economists believe that the Bank of England will be tough to deal with rising inflation, James Sproule, chief economist at Handelsbanken in the United Kingdom, said that the Bank of England’s Monetary Policy Committee should consider how stubborn it is to underestimate the increase in inflation this year.

“It is important to remember that just in February of this year, the annual inflation rate was 0.4%, and there were discussions about negative interest rates-all this is long gone and forgotten,” Sproule said, adding that the MPC needs to pay more attention to inflation. rise.

He added: “At least this fall should be considered starting to withdraw from the quantitative easing program, and the diversity of opinions on the Monetary Policy Committee needs to be preserved.”

In the financial markets, traders bet that the surge in inflation will force the Bank of England to raise interest rates earlier than previously expected to respond to inflation data.

The derivatives market related to the interest rate path of the Bank of England has now fully digested the expectation of raising interest rates to 0.25% by November 2022. Before Wednesday’s inflation data and the latest jump in US inflation this week, people did not expect monetary policy to tighten until May 2023.

Additional report by Tommy Stubbington

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