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June 16, 2021

UK inflation and CPI have beaten expectations, so why are people worried?

By Patrick Brusnahan

After a turbulent year for the UK, markets appear to be heading in the right direction and that direction is recovery. UK CPI is up 2.1% year-on-year and beaten targets from the Bank of England, inflation looks strong. So why are there still nerves? Patrick Brusnahan asks the experts

Inflation is up for the UK, but is the saying “what goes up, must come down” true?

Mike Owens, global sales trader, Saxo Markets

A strong reading from UK CPI, +2.1% CPI YoY and the first time in almost two years the number has beaten the Bank of England’s 2% target. On its own, the CPU pickup reflects higher prices as the economy emerges from lockdown and therefore supports the central bank’s current view that the inflation surge will be temporary.

Separately, Input data from the Producer Price Index recorded a +10.7% YoY rise in May showing clear pressure on prices of raw materials, fuel and transport pushing up the cost of goods for producers. This is pretty ominous and echo’s last week’s comments from Andy Haldane that further high street inflation can’t be far behind.

Sam Pham, investment strategist, Tilney Smith & Williamson

UK headline inflation CPI printed 2.1% year-on-year in May, beating economist consensus expectations of 1.8%, and also higher than the 1.5% rate in April. On a month-on-month basis, CPI rose 0.6% (0.3% expected, 0.6% prior). Excluding the volatile food and energy components, core CPI rose 2.0% year-on-year, against expectations of just 1.5% and April reading of 1.3%. Meanwhile, Retail Price Index (RPI) came in in line with expectations. The headline read 3.3% year-on-year whilst RPI excluding mortgage payments actually came in lower than expected, at 3.4%. Also in the release, Producers Price Index rose 4.6% year-on-year (expected 4.5%, 4.0% prior).

Although inflation came in higher than expected, the details showed price increases to be consistent with reopening of the UK economy post Covid-19. In particular, key drivers of high price increases came from base effects, higher energy prices, as well as jumping restaurant and hotel prices, among others. It remains to be seen if high inflation is transitory or not.

Nevertheless, we would reiterate that inflation risks remain to the upside due to the scale of stimulus and the UK economy reopening. In addition, the Bank of England Governor Andrew Bailey has made it clear they will not tolerate consistently above-target inflation of 2%. As a result, our preference is to hold inflation-linked government bonds rather than nominal government bonds in multi asset portfolios.

Ian Warwick, managing partner, Deepbridge Capital

Today’s inflation data serves as further evidence that that the UK economy is moving in the right direction at a significant pace. For many early-stage businesses however, the significant rise in inflation may trigger fears of a subsequent rise in interest rates, directly impacting how much they are able to borrow at a crucial time, when many expected the economy to full reopen again.

Therefore, the biggest problem for growing early-stage companies may be access to funding and as we focus on economic recovery, it remains critically important that scale-up businesses, particularly in high-growth sectors such as digital technologies and life sciences are supported; as they will be at the very heart of economic growth as we create an economy fit for the twenty-first century.

Government initiatives such as the Enterprise Investment Scheme (EIS) have never been more important for helping entrepreneurs and innovators source the funding they require, whilst also offering private investors with tax incentives to develop UK-supporting private equity portfolios. With our EIS funds reaching record levels of funding in 2020/21 it is evident that there is considerable demand from investors and financial advisers alike to invest in early-stage UK companies which we believe will be at the forefront of our economic recovery.

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