Against a backdrop of intensifying pressures, both at home and in the US, UK investors continued to focus on the outlook for inflation during June as sharp prices increases fuelled speculation that interest rates might have to tighten more rapidly than previously forecast.

Surging inflation: Against a backdrop of intensifying pressures, both at home and in the US, UK investors continued to focus on the outlook for inflation during June as sharp price increases fuelled speculation that interest rates might have to tighten more rapidly than previously forecast. The UK’s annualised rate of consumer price inflation surged from 1.5% in April to 2.1% in May, reaching its highest level since July 2019 and breaching the Bank of England’s (BoE’s) 2% target.

“Nearer 4% than 3%”: Manufacturing prices also soared during June, according to a survey by IHS Markit/CIPS, stoking concerns that these increases will have to be passed on to consumers. The British Retail Consortium (BRC) warned: “Cost pressures are bearing down”; prices are likely to rise later in the year as retailers are forced to pass on higher costs for food, shipping, and commodities. BoE chief economist Andy Haldane warned that inflation expectations felt “more fragile” than at any time since 1992 and believes consumer price inflation will be “nearer 4% than 3%” by the end of the year. BoE officials warned that “near-term upward pressure on prices could prove somewhat larger than expected” and predict that inflation will rise above 3% “for a temporary period”. Nevertheless, they continue to regard short-term strength in inflation as “transitory” and believe that expectations for inflation remain “well anchored”.

Resuming dividends: The FTSE 100 Index edged 0.2% higher over the month, while the FTSE 250 Index fell by 1.4%. Retailers DFS, Dixons Carphone and Halfords reinstated their dividend payouts, while publisher Bloomsbury announced a special dividend. Elsewhere, the ten-year UK gilt yield fell from 0.80% to 0.72% during June.

Growth picks up: The UK economy expanded by 2.3% during April, posting its most rapid month-on-month growth since July 2020. Activity was boosted as coronavirus restrictions were eased, allowing consumers to take advantage of the reopening of non-essential shopping and outdoor bar and restaurant spaces. Compared with April 2020, the economy expanded by a record 27.6% during April 2021; nevertheless, it remained 3.7% below its pre-pandemic level in February 2020. Optimism was also tempered by Prime Minister Boris Johnson’s announcement that the final stage of lockdown easing in England would be delayed from 21 June until 19 July in order to address the rapid spread of the Delta variant of the Covid-19 virus.

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This article was sourced from Adviser-Hub.co.uk.