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UK inflation rises to 0.7% in March

UK inflation rose to 0.7% in March as the cost of fuel and clothing rose, setting the scene for sharper increases later in 2021.
Consumer price inflation increased from an annual rate of 0.4% the previous month and was slightly below the 0.8% average forecast in a Reuters poll.

Rising fuel and clothing prices were partly offset by food prices that were lower than a year earlier, the Office for National Statistics said.

UK prices are forecast to rise strongly later in 2021 as energy bills increase and higher oil prices feed through. Prices are also rising compared with a year ago when Covid-19 lockdowns hit demand.

The Bank of England expects inflation to reach 1.9% by the end of 2021 but many economists think it will outstrip the BoE’s 2% target before then. The BoE’s chief economist has warned inflation could rebound unexpectedly but Governor Andrew Bailey has said the BoE will need convincing that prices will rise strongly in the aftermath of the Covid-19 crisis.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said inflation would be back to the BoE’s target soon but that its monetary policy committee (MPC) did not need to flinch. Higher unemployment should keep wages subdued and rising prices of goods in high demand during lockdowns, such as computers, are likely to subside, he said.

“Accordingly, we still think that CPI inflation will exceed the 2% target only briefly and modestly later this year, placing little pressure on the MPC to mull raising interest rates before 2023,” Tombs said.

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