UK Inflation Up to 2.1% pa

According to the Office for National Statistics (ONS), UK inflation rose to 2.1% pa in the year to May 2021 up from 1.5% pa in April 2021.

This Consumer Prices Index (CPI) inflation increase was driven by the rising cost of fuel and clothing.  Inflation is now at its highest since before the pandemic.

May’s increase of about 1.8% was above most economists forecasts and now inflation is above the 2% Bank of England’s trend growth target.

Fuel prices led to this month’s rise after falling this time last year and clothing prices added as the amount of discounting fell in May.

Motor fuel prices saw a 17.9% rise over the past year and represents the highest increase for more than 4 years The ONS said.

Clothing prices increased by 2.3% the largest rise since 2018 as retailers reduced their discounts a month after stores re-open.

The rise in inflation was partly offset by a negative impact from cheaper food and drink prices.  After seeing large rises last year, bread, cereals and meat prices fell.

Comment

This is the first time since the summer of 2019 that CPI inflation is above 2%.  Interestingly, the old measure for inflation, the Retail Prices Index (RPI) increased from 2.9% pa in April 2021 to 3.3% pa in May 2021.

These rises will fuel the debate as to whether interest rates should go up.  That said, we have said all long that governments around the world need a sustained period of inflation to devalue long term covid-19 debts/borrowing.  US inflation figures for last week were at 5% pa and the Federal Reserve has already signposted that it will no longer control inflation using interest rates for the "foreseeable future".  We believe that we should all have inflation hedged assets such as property and index linked bond and gilt funds in our portfolios for the time being.