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Inflation surges to 2.1% as economy picks up

Written by: Emma Lunn
Figures from the Office for National Statistics (ONS) showed the annual pace of price rose from 1.5% in April to 2.1% in the 12 months to May.

The rate for the rise in the Consumer Prices Index including owner occupiers’ housing costs (CPIH) is higher than the Bank of England’s target of 2%, and is the highest it’s been April 2019.

Rising prices for clothing, fuel, recreational goods, and meals and drinks consumed out resulted in the largest upward contributions to the change in the CPIH 12-month inflation rate between April and May 2021.

These were partially offset by a large downward contribution from food and non-alcoholic beverages, where prices fell this year but rose a year ago, particularly for bread and cereals.

A period of higher inflation will squeeze many households, especially those that have been impacted by reductions in income as a result of furlough, unemployment or pay cuts. In other cases, however, the excess savings accumulated during the pandemic as people have stayed at home will help offset a financial squeeze in the near term.

On a monthly basis, CPI inflation rose by 0.5% in May 2021, compared with little change in May 2020.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Inflation has bust the Bank of England target, as lockdown lows in 2020 fed into bumper price rises over the past 12 months. Petrol has risen by almost a fifth, while clothing has seen its biggest rise in three years. Spenders are feeling the pain in their pockets, and over the longer term, savers will see it eat away at the value of their savings too.

“The Bank of England was always expecting inflation to overshoot its target this spring, but it has taken the position that this is a short-term blip caused by rock bottom prices a year earlier, and as soon as they naturally fall out of the figures, inflation will drop away again. It isn’t worried by the rise and it isn’t expecting to raise interest rates in the immediate future to bring it back down again.”

The rise in inflation is good news for borrowers, but brings yet more misery for savers. It means we can’t expect savings rates to rise across the board any time soon.

Jason Hollands, managing director of Bestinvest, said: “A whole generation of savers and investors haven’t had to give too much thought to inflation which has been kept largely at bay since the 2008 global financial crisis.

“However, with the potential for a period of much higher inflation – perhaps in the 2 to 3% range – those with savings and investments should give careful consideration to the impact of rising inflation. Getting a return that at least keeps pace with inflation, really should be a top priority.”

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