Wednesday’s UK inflation figures have provided a short-term respite ahead of a big hill to climb in terms of the post-COVID economic recovery.
Analysts across the board have noted the drop to from 2.5% in June to 2% in July recorded by the ONS was merely a blip and that the pullback doesn’t invalidate the Bank of England’s forecast for inflation to hit 4% before 2022 — double its target rate.
The consumer price index was held back by an artificial bump in prices a year ago when the ONS stopped using estimates and started measuring prices. When this drops out of the figures, inflation will rise.
At the time of its 4% forecast, the Bank said price rises were set to hit a 10-year high in the final quarter of 2021. The forecast suggested the Bank may have to consider increasing borrowing costs via an interest rate hike.
“We are not out of the woods quite yet,” said Danni Hewson, financial analyst at AJ Bell. “Nando’s is the latest restaurant to be hit by supply chain issues, which are expected to continue right through the rest of the year. The prices paid and charged by factories are still going up and shortages and shipping costs will make the next few months a rather expensive business for importers.”
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Hewson says that job numbers and wage hikes announced on Tuesday will all also tie into this picture.
The U-shaped recovery in the labour market is causing labour shortages in some industries like health and social work and wage inflation. Underlying wage growth increased to 4% in the three months to June. But the picture is also being complicated by the wind down of furlough, which is yet to play out in data.
“If people have more to spend, they might be prepared to keep spending just that little bit more and businesses might need to push up prices to cover their costs, creating a lovely muddy circle.”
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