- June saw a second successive upside surprise for inflation, echoing the experience of the US. Though July should see some temporary respite, inflation is likely to increase through the second half of 2021.
- But the EY ITEM Club remains sceptical about the idea that the UK is entering a new era of sustained higher inflation. A stronger pound, a large amount of spare capacity and well anchored inflation expectations should eventually pull inflation back down.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“CPI inflation continued to accelerate in June, reaching a 34-month high of 2.5%. Around half of the pickup between May and June was due to higher petrol and food prices, the latter being largely a function of base effects after a soft reading last June. There was also a significant contribution from restaurants and hotels, which the ONS warns is partly a reflection of these venues being closed a year ago. And there was no evidence of a reversal of last month’s price increases in the clothing or recreation and culture categories.
“Strong base effects, caused by a rise in prices last summer as the economy reopened after lockdown, are likely to mean that CPI inflation temporarily falls in July. But this will provide only a brief respite and the EY ITEM Club expects the CPI measure to climb again over the remainder of the year, reflecting a combination of base effects, the reversal of the VAT cut for the hospitality sector, and upward pressures on global goods prices caused by component shortages and supply chain bottlenecks.
“While there is likely to be a period where inflation is running well above the Bank of England’s 2% target, the EY ITEM Club remains sceptical about the idea that the UK is entering a new era of sustained higher inflation. Much of the impact of a stronger pound is still to pass through to consumer prices, the large amount of spare capacity will weigh on wage growth and margins, and inflation expectations remain well anchored. The institutions and labour and product markets which facilitated high inflation in the past are also lacking.”