The price of oil may continue to exert upward pressure on inflation
The rate of inflation in the UK has more than doubled in April, amid higher energy prices and an increase in the cost of clothing.
The rise to 1.5% in April from 0.7% in March, confirms that prices are at their highest level since March 2020, the beginning of the coronavirus pandemic.
According to the Office for National Statistics (ONS), a rise in the oil price has caused an increase in the price of petrol.
Petrol prices are now at their highest point since January 2020.
“At current levels, inflation is nothing to fret about, but there is rising concern that the fiscal and monetary response to the pandemic has sown the seeds of an inflationary scare further down the road.”
“For the moment, the Bank of England is dismissing consumer price increases as a natural bounce back from the depths of the pandemic last spring. But the economic recovery could be a Trojan horse, smuggling inflation into the UK, right under the nose of central bankers,” says Laith Khalaf, financial analyst at AJ Bell.
The price of oil may continue to exert upward pressure on inflation, according to Khalaf.
“Much of the inflation of the last year can be explained away by an oil price rising from an exceptionally low $20 a barrel last spring to around $70 today. This effect will moderate as we start lapping the summer months of 2020, but even if oil prices remain where they are, they will continue to exert upward pressure on the headline rate of inflation number for the remainder of the year.”
“What’s more, as the global economy opens up, there is potential for further price rises as demand picks up again,” Khalaf added.
The UK is still well behind the US, where the latest inflation reading came in at 4.2%, and CPI inflation is still below the Bank of England’s 2% target.
“The Bank has made it clear that it will tolerate inflation rising modestly above target, without pulling the trigger on interest rate rises. However, if inflation looks like it’s going to get a significant foothold, markets will take matters into their own hands and raise borrowing costs across the economy. Inflationary fears have already started to trickle into markets, with the ten-year gilt now yielding 0.9%, up from 0.2% at the beginning of the year,” Khalaf commented.
A fortnight ago the Bank of England said that UK inflation is heading above its 2% target and it expected it to hit 2.5% at the end of 2021.
