UK inflation tests BoE as it jumps to highest since 2018

British inflation surged further above the Bank of England’s target in June to strike 2.5%, its highest since August 2018, placing a new focus on the BoE’s plan to keep its huge stimulus programme in place.

Prices for food and fuel rose as the economy bounced back from its lockdown slump, the Office for National Statistics said.

The jump exceeded all forecasts from economists polled by Reuters, who had mostly seen CPI edging up to 2.2% from May's 2.1%, and comes a day after U.S. inflation here hit its highest in 13 years at 5.4%.

Sterling strengthened against the dollar and euro. Two-year British government bond yields, which are sensitive to short-term inflation and interest rates, touched a three-week high.

“The Bank (of England) will likely feel that the time is rapidly approaching to dial down the level of support they are providing to the economy,” said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.

Most central bankers think the global surge in inflation will be temporary, and reflects supply-chain bottlenecks as Western economies emerge from the coronavirus pandemic.

The BoE revised up here its forecast for inflation last month to predict a peak of over 3%, though its outgoing chief economist, Andy Haldane, sees it nearer 4% by the end of the year.

The BoE expects inflation to fall back towards its 2% target over the next couple of years, as subdued pre-pandemic price trends and weak pay growth resume.

The central bank worries that the phasing out of the government’s jobs subsidies programme by the end of September could lead to higher unemployment, which would take the heat out of inflation.

The CPI’s acceleration reflects the weakness of demand last year when much of the economy was shut down and consumers were ordered to stay at home.

Global oil prices have climbed this year as the world economy recovers. Wednesday’s figures showed British fuel prices in June were 20.3% higher than a year earlier, the biggest rise since 2010.

Source: Reuters