Inflation doubles, but no rise in interest rates yet says City

Simon English
·2 min read
Rishi Sunak (PA Wire)
Rishi Sunak (PA Wire)

INFLATION has nearly doubled, with the cost of petrol and clothes rising but some foods getting cheaper. That’s seen as a turning point for the economy, as it re-opens for business and consumers unleash pent-up spending.

The latest figures from the ONS show that inflation in March rose to 0.7%, up from 0.4% in February.

That is still low, and far below the Bank of England’s target of 2%. But it will prompt talk that the government needs to be wary of it getting out of control, a blow to government finances and the ability of chancellor Rishi Sunak to service the national debt.

The City thinks interest rates will start rising next year. Paul Dales at Capital Economics said: “The economic recovery may not keep inflation persistently above 2.0% until late in 2023. That’s why we think the markets are wrong to price in the first interest rate hike from late next year. 2025 looks like a better shout to us.”

Paul Craig, portfolio manager at Quilter Investors: “From here, inflation may tick markedly higher if the steady drip of consumer spending morphs into a waterfall as lockdown restrictions are lifted and households spend some of their accumulated pandemic savings.

“But consumers turning on the spending taps once again shouldn’t evoke too much concern at the Bank of England. Even once restrictions are lifted, we will still be living in economically abnormal times, and the Bank will give the economy time to normalise before beginning to worry about inflation.”

“We are a long way away from central banks moving interest rates higher, and indeed the MPC has said they will not tighten policy until the economy has made up its pandemic losses and the inflation target has been met. This should give investors confidence to hold their nerve and remain diversified for the normalisation to come.”

Laith Khalaf,financial analyst at AJ Bell, said: “The spike in inflation is nothing to worry about - yet. We always knew inflation was going to rise once we started lapping the beginning of the pandemic, in particular the steep falls in energy prices witnessed in the spring of last year. Petrol prices were 4.3p higher in March than a year ago, when they stood at 119.4p. In May 2020, they dropped to 106.2p, so this upward pressure on inflation will continue to grow in the coming months, even if fuel prices are relatively stable now.

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