By Jeph Ajobaju, Chief Copy Editor
Rising prices of fuel and clothing combined to increase inflation to 2.1 per cent in May in the United Kingdom, a country, like others, still grappling with the effects of the pandemic that upends social and economy life, forcing lockdowns.
The UK economy is also affected by Brexit, which makes it more difficult for the country to do business with its biggest export market, the European Union (EU).
The inflation rate overshot the target set by the Bank of England for the first time in two years and stoked fears that the easing of pandemic restrictions since March will lead to a sustained rise in the cost of living.
On Wednesday, the House of Commons approved the extension of coronavirus restrictions in England until 19 July, per The Guardian (UK).
For now, limits on numbers for sports events, theatres and cinemas will remain in place, nightclubs will stay shuttered and people will be asked to continue working from home where possible.
But some Tory Members of Parliament (MPs) expressed doubt about the commitment of Prime Minister Boris Johnson that 10 July would be a “terminus” date for the lockdown after he was forced to postpone easing restrictions on 21 June.
Fuel, clothing, meals, books all chip in
The Guardian also reports that the price of fuel was one of the main drivers of inflation rate in May, soaring by almost 20 per cent from last year to push the rate up from 1.5 per cent in April.
The increase is ahead of a forecast by City economists of 1.8 per cent, and means the consumer price index has jumped by the most in six months.
On the high street, the cost of clothing, meals and pub and restaurant drinks also helped drive up prices, with online sales of computer games and music downloads a contributing factor, said the Office for National Statistics (ONS).
The price of clothes rose by almost one percentage point between April and May, though the ONS said the increase was the result of a return to a pre-pandemic pattern of seasonal price rises, in this case for summer dresses, T-shirts and sandals.
Books, which have proved popular during the three lockdowns, rose by 6.1 per cent over the last year, including an 11.9 per cent rise for fiction books, while carpets and other floor coverings increased by 8.3 per cent.
Bicycle prices rose 13.2 per cent over the past 12 months, which the ONS said could be mostly attributed to a shortage of high-end bikes that factories in China were unable to make and ship to the UK.
Some items that were stockpiled during the lockdowns fell in price in May, including flour and pasta. The cost of pizza and ice-cream prices rose, however, after a rush by consumers to buy food for outside parties and dining.
Petrol and diesel prices soared by 17.9 per cent, pushing the cost of a litre of petrol up from 106p on average in May 2020 to 127p in May 2021.
Some economists have voiced fears that inflation will continue to escalate as consumers spend an estimated £160 billion of savings accumulated over the last 16 months.
Shortages of raw materials, such as timber, and manufacturing components, including computer chips, could add to pressure to shop prices, The Guardian adds.
Comparison with the US
The pattern in the UK is mirrored in the United States, where inflation in May rose to the highest rate since 2008. It is running at 5 per cent, up from 4.2 per cent.
However, most economists said the recent spikes were likely to be replaced by modest increases over the next few months, before falling back next year as the distorting effects of the pandemic worked their way through the figures.
Nomura said it expected inflation to peak at 3.2 per cent while the economic consultancy Capital Economics said the peak was more likely to be lower, at 2.9 per cent.
“Inflation has risen sharply in recent months and will rise further as the impact of higher commodities prices feed through the supply chain.
“But UK inflationary pressures are different – and nowhere as near as large – as those causing fierce debate in the US,” said Jack Leslie, a senior economist at the Resolution Foundation thinktank.
“Looking ahead, with the medium-term outlook for inflation in the UK still relatively benign, policymakers should look beyond today’s figures and worry far more about rising unemployment than rising inflation.”
The concern is that central bank policymakers on both sides of the Atlantic will have little choice but to respond by increasing interest rates to limit the spending spree, with the effect that more firms will go bust and unemployment will grow.
However, Bank of England forecasts show inflation rising above its annual 2 per cent target only briefly over the next year before falling back.
The central bank has argued that consumers are likely to spend only a small fraction of their pandemic savings, putting less pressure on prices.
The price of raw materials on global markets has begun to fall, further easing concerns that the current increase in inflation will continue and be sustained into next year.
Wages had also remained subdued, increasing by 3 per cent over the past year, said the ONS, despite the highest vacancy rates on record and a higher rate of unemployment than before the pandemic.
The Bank of England expects inflation to stay below 3 per cent this year and fall back to the 2 per cent target over the next two years.
Global view on inflation
Financial Times adds that economists globally are monitoring price rises, with inflation accelerating as national economies open up. In the US, prices increased 5 per cent year on year in May, the fastest rise in almost 13 years.
Central bankers have expressed confidence that such steep rises will be temporary, driven by short-term supply chain bottlenecks, rising commodity prices and pent-up demand.
But some, including Bank of England (BoE) chief economist Andy Haldane, have warned against complacency over upside inflation risks.
After reaching a four-year low of 0.2 per cent last summer, consumer price inflation had doubled in April. May’s increase, driven in part by large sections of the hospitality industry opening after lockdown, brought inflation more swiftly than expected to the BoE’s 2 per cent target level.
This prompted disagreement among economists over its future path. Most had forecast that inflation would pass 2 per cent much later in the year.
Martin Beck, senior economic adviser to the EY Item Club, said the sharp rise had been driven by short-term factors and so was likely to be temporary.
“[We are] sceptical that the May data is a sign that the UK is entering a new era of sustained higher inflation,” he told Financial Times.
However, Paul Dales, chief UK economist at consultancy Capital Economics, said large price surges following the reopening of the economy suggested inflation would rise “a bit further” this year than the 2.6 per cent he had predicted.
Price increases were likely to fall back as the effect of reopening lessened, he added, but potentially less swiftly than expected. “We’re becoming a bit less confident that [inflation] will spend most of next year below 2 per cent,” he said.