BoE inflation target breached for second consecutive month as CPI rises 2.5%

CPI inflation rose by 2.5% in the 12 months to June 2021, up from 2.1% in May, according to the latest figures from the ONS.

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Rozi Jones
14th July 2021
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"If inflation continues to creep away from the Bank of England's 2% target, the central bank may be forced to act sooner than anticipated when it comes to raising interest rates."

On a monthly basis, CPI rose by 0.5% in June, compared with a rise of 0.1% in June 2020.

CPIH, which includes owner occupiers’ housing costs, rose by 2.4% in the 12 months to June, up from 2.1% in May, rising by 0.4% on a monthly basis.

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 CPIH 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 fell this year but rose a year ago.

Rachel Winter, associate investment director at 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 2% 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.

“UK individuals are collectively sitting on £1.7trillion of cash, most of which is in low interest accounts and is not keeping pace with inflation. Those with excess cash may wish to consider investing in assets that have historically offered protection against inflation. Commodities are an option, as are real estate investment trusts that can raise rental charges in line with inflation.”

Richard Carter, head of fixed interest research at Quilter Cheviot, commented: “UK inflation has breached the Bank of England’s inflation target for the second consecutive month, hitting 2.4% in the 12 months to June 2021 after increases in the cost of petrol, food, second-hand cars and eating out.

“Despite breaching the Bank’s target, and despite the US posting the biggest inflation print in 13 years yesterday, it’s still likely that this bout of inflation won’t be sustained over the long-term. The price increases in the UK are being driven by the sectors that struggled since the start of the pandemic. Most of these sectors registered negative price growth for many months in 2020 so it’s only natural that prices rise as demand returns. With second-hand cars in particular, this is being driven by the global semi-conductor shortage and therefore the shortage of new cars.

“The Bank will expect this bout of price increases to be transitionary, and one that will likely resolve itself over the next six months as the economy re-opens. The danger to the transitory narrative comes from the potential impact of this short-run inflation on wage growth. If higher prices seep into the labour market on a sustained basis due to labour shortages, we could see sustained inflationary pressures. Likewise, if inflation expectations become ingrained among consumers and producers, this could spell trouble. It is in this situation that the Bank of England will be compelled to act swiftly to remove the inflationary pressures.

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