UK: Inflation overshoots the BoE’s target – UOB

Economist at UOB Group Lee Sue Ann comments on the latest release of the UK inflation figures.

Key Quotes

“UK inflation jumped to 2.1% y/y in May, breaching the Bank of England (BOE)’s target for the first time in two years. The reading was above April’s reading of 1.5% y/y, and exceeded expectations of 1.8% y/y. In its May forecast, the BOE also projected a reading of 1.8% y/y. On a monthly basis, the CPI rose by 0.6% m/m in May, unchanged from April. Much of the inflationary pressures in May was due to price fluctuations caused by the COVID-19 pandemic. Fuel and clothing prices dropped a year ago when Britain’s first national lockdown reduced consumer demand, then rose again in May as restrictions imposed during a third lockdown were eased. In addition, the base effects from energy prices continued to lift price gains with fuel costs rising by 1.3% y/y after dropping 2.4% y/y at the same time a year earlier.”

“Going forward, the path of inflation will likely remain volatile for some time. A recovery in oil prices will continue to boost inflation over the summer. The withdrawal of the VAT cut for hospitality businesses will also temporarily lift inflation. However, a strengthening pound and adequate labour supply are likely to keep inflation under control. While an eventual re-opened economy could see rapid economic growth over the next two years, there is still a significant level of slack which would prevent higher inflation from taking hold. As such, we see inflation peaking at around 2.5% later this year before price pressures are expected to ease back below the BOE’s 2% target.”