Increases in the cost of transport and clothing drove UK prices up last month, beginning what most economists expect will be a return to normal levels of inflation as lockdown draws to a close.
Consumer prices rose at an annual rate of 0.7 per cent in March, up from 0.4 per cent the previous month, according to figures from the Office for National Statistics released on Wednesday. Analysts had expected a figure of 0.8 per cent.
Economists are watching the measure closely as the UK eases lockdown, which some fear could bring a period of rising prices driven by loose monetary policy and the release of pent-up demand as consumers spend savings that they have built up over the past year.
Andy Haldane, the Bank of England’s chief economist, in February warned central banks against complacency on the “tangible risk” of rising inflation, comparing it to a “difficult to tame” tiger stirred by ultra-loose monetary policy.
But others are sanguine about an expected jump, which follows a sharp drop in inflation during the pandemic including a four-year low last summer. Most argue that prices are unlikely to increase to the extent the Bank’s Monetary Policy Committee is forced to act.
BoE governor Andrew Bailey is among those who argue inflation will probably rise towards 2 per cent in the next few months. But he said last month there was “no evidence” to suggest it would threaten price stability by rising to 4 or 5 per cent.
Responding to Wednesday’s figures, Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, estimated that inflation would jump to 1.7 per cent in April as the cap on tariffs for electricity and natural gas prices is removed and shops and bars reopen.
“We still think that CPI inflation will exceed the 2 per cent target only briefly and modestly later this year, placing little pressure on the MPC to mull raising interest rates before 2023,” he said.
The rise in March was driven mostly by increases in motor fuel prices, followed by clothing — which recovered at the end of the usual sales period. It was offset by falling prices for food.
Over the coming months rising energy prices and upward pressures from the reopening of the economy are likely to be offset by slack in the labour market, analysts said.
ONS figures released on Tuesday showed that UK employers began hiring again in March, but with more than 4.7m still on furlough and youth long-term unemployment at a five-year high.
“A broad-based pick-up is likely over the summer months, as activity snaps back,” said Debapratim De, senior economist at advisory firm Deloitte.
“However, economic slack and rises in unemployment should limit inflationary pressures, maintaining the Bank of England’s supportive policy stance.”
Source: Economy - ft.com
