UK inflation has climbed to its highest rate in almost three years as the economy continues to unlock from its Covid restrictions, adding to worries that interest rates could rise sooner than expected. 
The consumer prices index (CPI) measure of inflation hit 2.5 per cent in the year to June driven by higher food and fuel costs, according to the Office for National Statistics (ONS). Inflation was last higher in February 2018.
June’s rate is up from the 2.1 per cent recorded in May and marks the second month in a row when inflation was higher than the Bank’s 2 per cent target.
12-month CPI inflation rates over 10yrs
Source: ONS
On a monthly basis, CPI inflation was up by 0.5 per cent in June 2021, compared with a rise of 0.1 per cent in June 2020. Higher prices for food, second-hand cars, clothing & footwear, eating & drinking out and motor fuel are the main reasons for the higher monthly rate.
Inflation has been ticking up across the globe as countries start to recover from its coronavirus lockdowns. The most recent numbers from the US, for example, show CPI inflation reached a 13-year high of 5.4 per cent in June.
Although central banks have suggested they are willing to tolerate higher-than-target inflation to support the recovery from the coronavirus pandemic, investors are starting to worry that they may have to tighten policy sooner than expected.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “The creeping UK headline inflation rate is likely add to the sense of unease pervading the financial markets about the impact higher prices will have on economies around the world, as concerns about new Covid variants also rise. The FTSE 100 opened lower amid expectations central bank mass stimulus programmes may start to be eased more quickly, even though the recovery remains fragile.
“Although, for the moment, central banks are largely keeping their cool, appearing confident the spectre of lingering inflation will disappear, there are increasing signs of nervousness among investors, especially as readings in other countries also show price spikes. Although much of the increases are related to the unusually low level of prices last year due to the pandemic effect, it appears genuine price inflation is also occurring.”
But Close Brothers Asset Management chief investment officer Robert Alster cautioned investors against seeing today’s higher inflation print as suggest the Bank of England will be under immediate pressure to lift interest rates.
“Inflation is likely to oscillate in the coming months as the economy starts to see the benefit of next week’s removal of social restrictions coupled with resulting labour supply shortages,” he said.
“In ‘normal’ times it’s possible that the Bank of England might consider deploying tools to keep a lid on inflation over the summer. But these are not normal economic times. With the furlough scheme coming to an end, and the possibility – hopefully remote - of social restrictions being reintroduced towards the winter - the Bank will be keen to hold off from making any decision on interest rates unless inflation looks like it’s rising too quickly.”