AJ Bell’s analysis of today’s UK inflation figures

  • CPI rises to 2.5%
  • Transport, clothing and cakes drove rising prices
  • Watch out for H1 banking sector results

Laith Khalaf, financial analyst at AJ Bell, comments:

“Inflation has risen ahead of economist’s expectations and is now firmly above the Bank of England’s target. However we’re still stuck in inflationary limbo, where we can’t tell if rising prices are a statistical blip, or a more concerning and permanent feature of the global economic recovery. Things aren’t running quite as hot on this side of the Atlantic, with UK inflation still only around half the rate in the US. Nonetheless the direction and speed of travel is worrying, when you consider that only a few months ago, UK inflation sat at a lowly 0.4%.

“Markets appear to have swallowed their inflationary concerns for now though. The yield on the benchmark 10 year gilt looked like it might be heading up to 1% in spring, as an end to lockdown beckoned. But sometimes it’s better to travel than to arrive. With Freedom Day in touching distance, yields have now fallen back to around 0.6%, though central bank bond buying activities continue to obscure what is the true market price for these assets.

“There is some balm for inflationary concerns in the sources of upward price pressure, which came from hitherto mothballed areas of consumer spending such as transport, clothing and hospitality. This supports the hypothesis that rising inflation is largely a function of comparing today’s open economy with last year’s closed shop. The price of cakes and crumpets also rose sufficiently to play a role in pushing inflation up, which will strike a tart note for Mr Kipling and his customers.

“Looking forward, it’s going to be a while until CPI data will reveal if long term inflation is under control or not. In the meantime, the upcoming first half results from UK banks should give some indication of how concerned we should be about inflation. If loan growth is rising sharply, that will mean the amount of money in the economy is surging, and will likely find its way into price rises. If loan growth remains subdued, that suggests economic activity is relatively well anchored, and the central bank is right to look through today’s inflation numbers.”

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