UK inflation edges up as COVID price hit begins to ease

People shop at market stalls, with skyscrapers of the CIty of London, Britain financial district seen behind, in London
David Milliken and William Schomberg
·3 min read

By David Milliken and William Schomberg

LONDON (Reuters) - British inflation picked up in March as global oil prices rose and retailers scaled back their COVID-driven discounts, and it is expected to keep climbing as the economy reopens from lockdown.

Consumer price inflation rose to 0.7% in March after dipping to just 0.4% in February, slightly below the average forecast of 0.8% in a Reuters poll of economists, according to official figures published on Wednesday.

"The rate of inflation increased with petrol prices rising and clothes recovering from the falls seen in February," Office for National Statistics official Jonathan Athow said.

British inflation is forecast to rise in the coming months, due to an increase in regulated household energy bills in April, higher global oil prices and comparisons with prices a year ago when COVID lockdowns caused demand to slump.

Fuel prices in March showed their biggest annual increase since January 2020. Clothing and footwear prices rose by 1.6% on the month after store closures caused by lockdown rules had caused discounting in February, the biggest increase since 2017 for the time of year. Clothing and footwear prices were still 3.9% lower than a year before, and food prices were 1.4% down.

The Bank of England forecast in February that inflation would reach 1.9% by the end of 2021 but many economists now expect it will exceed its 2% target before then.

In the medium term, the BoE sees less upward pressure on inflation because of weakness in the job market, which it expects to persist even after the economy returns to its pre-pandemic size which it has forecast will happen early next year.

"Unlike the U.S., where we expect inflation to be relatively sticky above 2%, we think the UK story is likely to be less exciting. Partly this is because we think the pent-up demand story may be less pronounced than in the States," James Smith, an economist with ING, said.

Financial markets see about a 50% chance of a quarter-point increase in interest rates by the Bank of England by the end of next year, but many economists think it could take longer for the BoE to move.

"We believe the Bank of England is most likely to hold off from acting throughout 2021 but there is clearly a growing possibility that the Bank could tighten monetary policy in 2022 - although at the moment, early-2023 seems more likely," Howard Archer, an economist with EY Item Club, said.

Paul Dales at Capital Economics, said 2025 was his bet for a first rate hike.

BoE Chief Economist Andy Haldane in February likened inflation to a "tiger" that could be roused easily. But his view is not widely shared by other members of the Monetary Policy Committee, from which he will step down in June.

Wednesday's data did show some signs of inflation pressure in the pipeline.

The ONS said prices charged by manufacturers rose by 1.9% in the year to March, the highest in nearly two years, and the prices they paid for their inputs jumped by almost 5.9%, the most since September 2018.

(Reporting by David Milliken; Editing by William Schomberg and Angus MacSwan)