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Inflation passes BoE target as food and transport costs rise

by: Emma Lunn
  • 14/07/2021
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Inflation passes BoE target as food and transport costs rise
The consumer prices index (CPI) measure of inflation rose by 2.5 per cent in the 12 months to June 2021, up from 2.1 per cent in the 12 months to May.


On a monthly basis, CPI rose by 0.5 per cent in June 2021, compared with a rise of 0.1 per cent in June 2020. The inflation rate exceeded economists’ forecasts and passed the Bank of England’s stated target of 2 per cent.

The consumer prices index including owner occupiers’ housing costs (CPIH) measure of inflation rose by 2.4 per cent in the 12 months to June 2021.

Prices for food, second-hand cars, clothing and footwear, eating and drinking out, and motor fuel rose in 2021 but mostly fell in 2020, resulting in the largest upward contributions to the change in the CPI 12-month inflation rate between May and June 2021.

These were partially offset by a large downward contribution from games, toys and hobbies, where prices rose a year ago but fell this year.


Base rate decisions

Rachel Winter, associate investment director at investment firm Killik & Co, said: “Increased inflation in many instances remains a positive sign of much-needed economic growth. However, if inflation continues to creep away from the Bank of England’s two per cent target, the central bank may be forced to act sooner than anticipated when it comes to raising interest rates.

“At the moment, rising inflation is thought to be a temporary blip caused by a variety of factors. One being the high oil price, which has resulted in increased prices for items such as petrol. Additionally, as ‘Freedom Day’ approaches, the hospitality industry has experienced a surge in demand as a result of the relaxation of coronavirus restrictions.”

Sarah Coles, personal finance analyst at Hargreaves Lansdown, added: “Views on the outlook for inflation are like tongue-prints. Everyone has one, each one is different from the last, and it’s not always something that’s better when aired.

“The Bank of England expects inflation to keep rising this summer, and hit three per cent before dropping back. It’s currently sticking with its forecast that this will be a temporary blip that will drop back once last year’s lockdown lows fall out of the figures. It says it’s not planning to raise rates in the immediate future. This isn’t a million miles from the position of the Federal Reserve in the US.”

She added: “However, inflation prediction is always a thorny business, and there are some indications that we could be seeing the beginning of an inflationary cycle, as commodity price increases have now fed through into factory gate prices, which in turn could then feed into price rises.

“There’s also the chance that the pandemic hasn’t delivered the last of its nasty surprises. If new variants mean closures and restrictions, it could wipe out most of the inflationary pressures overnight, and inflation could drop back even sooner than expected.”

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