Inflation rose in the 12 months leading up to January 2021 despite a year of lockdown, according to the Office for National Statistics (ONS).
ONS data revealed that the consumer prices index (CPI) rate of inflation rose by 0.7 per cent in the year leading up to January 2021. The main groups contributing to the rise in inflation were food & non-alcoholic beverages, furniture & household goods and restaurants & hotels
CPI is the rate at which household goods and services rise and fall and is usually measured over a 12-month period.
Charles Hepworth, investment director of GAM Investments, said the latest inflation figures were a long way off the Bank of England’s 2 per cent target, making it “hardly a cause for concern in the short term”.
“While some household goods and food costs increased, there is still widespread disinflation and even deflation in clothing prices as shoppers were forced to stay away from stores due to the current lockdown,” he added.
“Pockets of inflation will continue to surprise and it is more than likely that we are at the nadir of the inflation cycle – if we are to move into the hoped for recovery for the UK economy then this reflation by definition will be inflationary if only for a transitory period and that won’t bode well for sovereign bond holders.”
Neil Birrell, chief investment officer at Premier Miton Investors, agreed that the latest statistics don’t indicate that “inflation is roaring back”.
“But they are historic; looking ahead, what we hear on Monday about the easing of lockdown restrictions will drive the view of where inflation is heading and that is undoubtedly upwards as we go through the year,” he said.
Laith Khalaf, financial analyst at AJ Bell, seconded this, saying: “In the short term it’s pretty nailed on that inflation will rise quickly towards the Bank of England’s 2 per cent target in the coming months, as the big energy price drops of spring 2020 start to get lapped by fresh data and the temporary VAT cut for hospitality and leisure businesses expires in April.
“That all coincides with the anticipated lifting of the current lockdown, when price collection will start to more accurately reflect normal activity.”
He added: “Beyond that the crystal ball is particularly cloudy, which is problematic, seeing as inflation and deflation pose very different risks to savers and investors. But the burden of proof currently lies with those who think rising prices will be a problem, because the last decade of ultra-loose monetary policy has failed to coax the inflation genie out of the bottle.”
While Khalaf expects inflation to “remain under control”, for the next year he added that the low interest rates being paid on cash means “that most money in the bank will be losing its buying power”.
“Seeing as wealthier Britons have stashed so much away over the course of repeated lockdowns, that should be supportive of UK asset prices, in particular residential property and equity markets,” he finished.