The UK’s rate of inflation rose to a higher to 3.2% in August compared to the same month last year, data from the Office for National Statistics (ONS) revealed.
The Consumer Price Index (CPI) rose from 2% in July, the biggest month-on-month increase in annual inflation since records began in 1997.
Derrick Dunne, CEO of YOU Asset Management, said the spike should remind investors that a 4% rise by the end of the year “is still on the table.”
Dunne described UK inflation as “back with a vengeance,” following the dip in July.
However, the increase in inflation wasn’t totally unexpected given the low base from last year and Dunne said that this leap will not be enough to shift the Bank of England’s monetary policy immediately.
But, he added that “the current rate of quantitative easing can’t last forever and savers and investors should continue to anticipate a rise in interest rates at some point next year, if not before.”
One of the big questions is when this interest rate hike will materialise.
Hugh Gimber, global market strategist at J.P. Morgan Asset Management, said that the central bank will be “reluctant” to make changes until its confident that the economy has successfully managed the end of its furlough scheme, which ends this month.
The employment picture is positive with the number of people on payroll now back to pre-pandemic levels, ONS data found.
“With inflation running hot and wages on the rise, the Bank looks quite likely to be one of the first major central banks to hike rates next year.
“In this context, the historically low level of UK gilt yields appears inconsistent with the inflationary pressures building in the economy,” Gimber said.
Several factors contributed to rising prices in August. The biggest driver was once again from hospitality due to restaurants, bars and hotels prices being lower last year because of the government’s ‘Eat Out to Help Out’ scheme discounting food and reducing VAT for the sector.
There was also a boost from the second-hand car market. Supply chain issues and a global shortage of semiconductors has caused the manufacturing of new vehicles to be delayed and consumers have turned towards second-hand options. Prices for second hand cars have risen 18.4% since April this year compared with a 1.4% increase during the same period last year.
The ONS called these rising prices “temporary” especially in the hospitality sector. But Laura Suter, head of personal finance at AJ Bell, pointed out that the Bank of England has predicted prices will rise further from here before the end of the year, “so we shouldn’t bank on this being a flash in the pan”.