- May’s inflation data saw the UK follow many other major economies in seeing a sizeable upside surprise. But this was largely due to the clothing and recreation and culture categories, which have been volatile through the pandemic, and means this is not overly concerning for the time being.
- The EY ITEM Club believes there is a good chance that much of May’s pickup in inflation will unwind in June. And though a temporary period of higher inflation is in prospect, it is unlikely to be the start of a regime change and a new era of persistently elevated price pressures.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“CPI inflation data revealed a surprising increase in May, accelerating to 2.1% from 1.5% in April. This was a 22-month high. The main sources of the upside surprise were rises in prices in the clothing and recreation and culture categories, both of which have been prone to significant month-to-month volatility, particularly through the pandemic when price changes have not followed typical seasonal patterns. Alongside this, rising petrol prices were also a key factor, partly due to the recent rise in the price of oil and partly reflecting the strength of base effects caused by the fall in petrol prices last spring.
“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. The risk of higher inflation in the short term has risen due to the escalation in price pressures further down the supply chain, largely caused by bottlenecks and component shortages. And the staged end to the temporary VAT cut for the hospitality sector will also temporarily push the CPI rate higher in the second half of the year.
“But 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.”