Economic recovery boosts inflation

14th June, 2021

The annualised rate of UK inflation surged during April from 0.7% to 1.5%, stoked by a sharp appreciation in the cost of household utilities and clothing. Although the rise had been widely anticipated, it fuelled concerns that higher costs could persuade central banks to increase interest rates more quickly than predicted. The Bank of England (BoE) expects the rate of consumer price inflation to reach 2.5% at the end of this year, after which it is forecast to subside to 2%. The ten-year UK gilt yield eased from 0.84% to 0.80% over April but rose as high as 0.90% during the month.

Management Office (DMO) reported that the launch of a new index-linked gilt had raised a record £6.1 billion during May. The new bond – which matures in 2039 – had a nominal value of £4 billion.

The BoE expects the UK economy to expand at its most rapid rate since the Second World War this year, boosted by strong consumer demand and a successful vaccine rollout. Following 2020’s record contraction in GDP, the central bank predicts that the UK economy will rebound by 7.25% in 2021. BoE policymakers believe that weakness in the labour market will be far less pronounced than previously feared, and unemployment is now expected to increase “only slightly”. Nevertheless, the BoE emphasised that the evolution of the Covid-19 pandemic remains uncertain, and the Monetary Policy Committee (MPC) does not intend to tighten interest rates until there is “clear evidence” of a sustainable recovery.

Although the UK economy contracted at by 1.5% during the first three months of 2021, it expanded by 2.1% during the month of March, buoyed by the stronger retail activity and the reopening of schools. The rate of unemployment eased to 4.8% over the three months to March, and the number of UK job vacancies rose to 657,000, reaching their highest level since the same period in 2020.

The Confederation of British Industry (CBI) reported that UK manufacturing output posted its fastest rate of growth since December 2018, with activity increasing in 12 of 17 subsectors, including chemicals, electronic engineering, and metal products. Manufacturers believe activity will accelerate further over the next three months; nevertheless, their optimism has been tempered by the expectation of rising cost pressures.

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