UK inflation rates double amid post-lockdown spending splurge

Britain’s inflation rate doubled in April, marking the beginning of a surge in prices that will fuel speculation about when the Bank of England could start taking its foot off the stimulus pedal.

Consumer prices rose 1.5 percent from a year earlier last month after a 0.7 percent gain in March, the Office for National Statistics said on Wednesday. The reading was in step with economists’ expectations.

The April figures were mainly driven by a jump in domestic energy prices and clothing. But with the UK’s re-opening allowing consumers to start splurging cash, the central bank expects inflation to exceed its 2 percent target later this year.

What happens beyond that is subject to debate. While the BOE sees the price gains as temporary, investors are betting that the UK’s recovery — and the accompanying inflationary pressures — will force policy makers to raise interest rates next year. That’s much sooner than what most economists expect.

Wednesday’s report also showed that gas and electricity prices surged 9 percent in the month, driving the higher inflation reading and motor fuel gained after crude oil increased.

Meanwhile, clothing and footwear prices rose 2.4 percent in the most recent report after a 1.6 percent drop a year ago and a measure of input prices paid for raw materials by factories rose 9.9 percent from a year earlier, the fastest rate since February 2017.

Metals and non-metallic minerals provided the largest contribution to the increase.

Andy Haldane, the BOE’s outgoing chief economist, dissented in an 8-1 vote this month to keep the central bank’s stimulus program unchanged. He argued that the momentum behind the recovery is strong enough to risk a damaging wave of inflation.

“Experience during the 1970s and 1980s demonstrates that, once out of the bottle, the inflation genie is notoriously difficult to get back in, Haldane wrote in the Daily Mail newspaper last week.”

Market-based inflation expectations are now at their highest since 2008. The so-called 10-year breakeven rate — a gauge derived from the difference between conventional gilt yields and those linked to retail-price inflation — has risen more than 50 basis points this year.

Concerns about inflation are mounting globally. In the US, consumer prices climbed in April by the most since 2009, though Federal Reserve officials view the pickup as temporary and have signaled their intent to maintain ultra-easy policy even with inflation running above their 2 percent goal.

Haldane has described inflation as “a tiger that may not remain tame for long after the government relaxes lockdown rules. Consumers accumulated at least 150 billion pounds ($213 billion) of excess savings while most shops were shut and may splash out at least 10 percent of that in the coming months, the central bank estimates.

Most members of the BOE’s policy panel expect UK inflation will ease after this year, averaging 2 percent in 2022 and 2023. The surge expected this year is attributed to a decline in energy costs last year falling out of the comparison and by a recent increase in crude oil and natural gas prices.

“We think inflation could go above target a bit temporarily later this year for these base effects,” BOE Governor Andrew Bailey told a panel of lawmakers in the House of Lords on Tuesday. “We see the bounceback in the economy but we don’t see the momentum continuing forwards at that pace at all.”

Policy makers are pumping 150 billion pounds into buying bonds this year, part of an effort to keep a lid on interest rates in financial markets. Yields on the government’s 10-year gilt have risen gradually in recent weeks in anticipation that the BOE’s next move is to tighten policy.

For now, Bailey and his colleagues have signaled they will tolerate an increase in inflation and that they don’t intend to move until there’s a more sustained pickup in prices.

The UK faced major bouts of inflation in the 1970s and 1980s, but the BOE has overlooked more recent increases that it judged were temporary. Prices surged close to 5 percent both in 2008 and 2011, fueled by a drop in the value of the pound that pushed up import prices. In both cases, the BOE stuck with its stimulus to support the economy after the financial crisis.

“We’re still seeing inflation coming back to target and then a temporary period where it may rise above — and we see the risks about that balanced, BOE Deputy Governor Dave Ramsden told the House of Lords panel on Tuesday. “We keep a very close eye on inflation expectations measures. We’re very vigilant to any sense that inflation expectations would de-anchor.

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