By Ian McConnell

Business Editor

ANNUAL UK inflation has surged unexpectedly above the Bank of England’s two per cent target but economists, while projecting it will move higher in the short term, do not expect the jump to trigger swift monetary policy tightening.

Official data published yesterday showed annual UK consumer prices index inflation climbed from 1.5% in April to a 22-month high of 2.1% in May, with the increase fuelled by higher petrol and clothing prices. The 2.1% rate was above all 33 forecasts in a poll of economists by Reuters which had signalled an expectation of a rise to 1.8%.

Martin Beck, senior economic adviser to the EY ITEM Club think-tank, is among those projecting inflation will move higher still in the short term, citing supply-chain bottlenecks and shortages of components and the staged ending of a temporary cut in value-added tax for hospitality businesses.

However, he said: “The EY ITEM Club is sceptical that the May data is a sign that the UK is entering a new era of sustained higher inflation.”

Mr Beck added: “There are still some powerful forces set to weigh down on inflation further out. Most notably, much of the impact of a stronger pound is still to pass through to consumer prices, while the large amount of spare capacity will weigh on wage growth and margins. So, while the UK is likely to see a period where inflation is above 2%, it should slip back once the impact of the reversal of the VAT cut has washed through.”

Luke Bartholomew, senior economist at Aberdeen Standard Investments, said: “Like many economies, the UK is experiencing a sharp increase in inflation as the economy unlocks and various business sectors work through supply bottlenecks and other idiosyncratic quirks. Inflation will likely increase a little more from here in part due to the reversal of the VAT cut for hospitality.

“However, we are not especially concerned that this increase in inflation will persist. Once the one-off effects currently buffeting the economy have passed, inflation should start to moderate as spare capacity weighs on price pressure. So for now there is little reason for investors to worry that the Bank of England will soon be withdrawing its monetary support.”

UK base rates have been cut by the Bank of England’s Monetary Policy Committee to an all-time low of 0.1%.

And the Bank of England has provided major monetary stimulus by ramping up its quantitative easing programme, implemented largely through purchases of UK government bonds.

The Old Lady of Threadneedle Street has now accumulated £895 billion of assets, comprising £875bn of UK government bonds and £20bn of non-financial, investment-grade corporate bonds, under the QE programme which began more than a decade ago in response to the global financial crisis.

Danni Hewson, financial analyst at stockbroker AJ Bell, also signalled a view that central bankers would stay their hand on monetary policy for now, in spite of rising inflation.

She said: “Whilst the scale of the jump might cause a little wince from some quarters...no one expected inflation wouldn’t rise in May. With restrictions easing and people excited to dip into their pent-up savings and embrace old lifestyles, it was a recipe designed to heat up the economy. And some price hikes come off the back of huge falls a year ago – compare the cost of a litre of petrol when most of us were stuck at home and that plays nicely into the ‘this is a transitory issue’ conversation.”

Ms Hewson added: “Whether the delay in reopening eases some of the pressure or whether lack of supply continues to ramp up prices will be something to watch. What is clear is there is mounting pressure in the supply chain, something reflected by more big increases in producer price inflation. With shipping costs soaring, commodity prices increasing and the shortage in semiconductors expected to continue into next year, the pressure isn’t expected to be released in the short term.

“The temperature has risen – not as fast or as far as in the US but still significantly. Central bankers will be feeling the heat but aren’t expected to put out any fires quite yet. Getting those economic engines up to speed requires time – the trick will be making sure the brakes are engaged before we hit the bend.”

The Office for National Statistics, publishing the inflation data yesterday, noted that average petrol prices were 127.2 pence per litre in May 2021, compared with 106.2p a year earlier.

It pointed out the UK had been “in the first national lockdown at this point last year and petrol prices were affected by reduced demand, reaching their lowest price in May 2020 for over four years”.

Clothing and footwear prices rose 2.3% between April and May, the ONS data showed, a much-greater movement than a 0.3% increase between the same two months of last year.

The ONS said: “In May 2020, the proportion of discounting was relatively high during the first coronavirus lockdown when demand may have been reduced as a result of less browsing in stores, people spending more time at home where they might have been less interested in clothing, and a shift in spending patterns towards other necessities such as food and cleaning products. The upward effects this year came from a broad range of women’s, men’s and children’s clothing and footwear.”

Annual inflation on the old, all-items retail prices index measure rose from 2.9% in April to 3.3% in May.