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U.K. Inflation Remains Subdued Despite Jump in Food and Fuel

David Goodman
·3 min read

(Bloomberg) -- U.K. inflation accelerated during the last month of a national lockdown to control the coronavirus, buoyed by the cost of fuel and clothing.

Consumer prices rose 0.7% from a year ago in March after an 0.4% gain the month before, the Office for National Statistics said Wednesday. Economists had expected an 0.8% increase. Core inflation climbed to 1.1% from 0.9%.

While inflation has held below the Bank of England’s 2% target for 1 1/2 years, policy makers anticipate it will surge this year as the economy recovers from its worst slump in three decades.

Some analysts, notably the central bank’s Chief Economist Andy Haldane, are concerned about upside risks for the measure as consumers unleash some of the 150 billion pounds ($209 billion) in excess savings they accumulated when shops and restaurants were closed for lockdown.

Haldane, due to step down in June, has called inflation a “tiger has been stirred” that may “prove difficult to tame.” The rest of the nine-member Monetary Policy Committee has been relaxed about that prospect, saying they need to see a sustained increase in prices before tightening their stimulus program.

What Bloomberg Economics Says...

“U.K. inflation began what is likely to be a rapid ascent in March. We expect the annual rate to more than double next month and stand above the Bank of England’s 2% target by the end of the year. Ultimately the move is likely to prove temporary and won’t send alarm bells ringing at the central bank.”

-- Dan Hanson, senior economist. Click here for full REACT.

There was more evidence of inflation at the wholesale level and for manufacturers. Producer prices, measuring the cost of goods leaving factories, rose 1.9% from a year ago in March, the most since the middle of 2019 and above forecasts for a 1.7% gain. Raw materials costs rose 5.9% from a year ago, higher than the forecast for 4.3% and the most since September 2018.

The Bank of England estimates consumer price inflation will reach the target later this year and average 2.3% in 2022. The government’s Office for Budget Responsibility forecasts it will remain below target thorough 2023.

Base effects contributed to the strong showing in the month. Clothing and footwear prices rose 1.6% in March after a 0.4% fall a year earlier. The rise in clothing and footwear followed two months of decline caused by the pandemic disrupting the usual seasonal patterns.

Auto fuels gained 2.9% after a decline of 4% a year earlier. That upward pressure on the index was partly offset by food, which fell 0.8% on the month.

Market expectations for inflation are also elevated, with the so-called 10-year breakeven rate close to the highest since 2008. The gauge, which is derived from the difference between conventional gilts yields and those linked to retail-price inflation, has risen almost 50 basis points point so far this year.

(Updates with details from the statement.)

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