UK inflation rises to 0.7% driven by higher cost of fuel and clothing

Acceleration in consumer prices came during last month of lockdown

A man fills up his car from a petrol pump at a garage in Ellesmere Port in north west England. The rate of inflation increased in March with petrol prices rising and sales of clothes recovering from aShow more

The UK's inflation rate rose to 0.7 per cent in March from 0.4 per cent in February, pushed up by higher fuel and clothing, official data showed.

The acceleration in consumer prices came during the last month of the third lockdown in England and amid tighter restrictions across the rest of the country.

Jonathan Athow, statistician at the Office for National Statistics, said the rate of inflation increased with petrol prices rising and sales of clothes recovering from a decline in February.

"However, food prices fell back on the year, as prices of some staples were lower than at the start of the pandemic,” he said.

Inflation dipped unexpectedly in February, partly because of the biggest annual contraction in clothing and footwear prices since 2009.

However, the discounting in February eased in March, the ONS said, though it was still high for this time of year.

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

While inflation has held below the Bank of England’s 2 per cent target for 18 months, analysts expect it to surge this year as the economy recovers from its worst recession in 300 years.

BoE chief economist Andy Haldane raised concerns in February about upside risks for the measure as consumers start spending some of the £150 billion ($209bn) in excess savings they accumulated when shops and restaurants were closed during lockdown.

Adam Vettese, analyst at multi-asset investment platform eToro, said while the first signs of inflation are starting to emerge now that some restrictions are lifted and households can spend again, this should not be viewed as a threat but rather as a sign of increased economic activity.

“The fact transport and fuel costs were the biggest contributors to inflation in March suggests both individuals and firms are taking back to the road, which is a tell-tale sign of increased economic activity,” he said.

“In normal times, a 0.3 percentage point rise in inflation might be enough to cause unease among BoE officials and investors, but it’s likely both will stomach rising prices as a consequence of the economic recovery for now.”

While the BoE expects inflation to reach 1.9 per cent by the end of this year, Mr Haldane, who is set to step down in June, called inflation "a tiger" that may prove difficult to tame.

The rest of the nine-member Monetary Policy Committee were more relaxed about the prospect of rising inflation, saying they need to see a sustained increase in prices before tightening their stimulus programme.

Janine Boshoff, economist at the National Institute of Economic and Social Research, said the gradual easing of the winter lockdown could introduce some volatility over the short term, as items in the non-essential retail, restaurant and hotels categories are reintroduced to the calculation of consumer inflation.

Meanwhile, Paul Craig at Quilter Investors said the UK has reached a turning point in its economic reaction to the pandemic where price growth is now on an upward trajectory.

"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 saving,” Mr Craig said.

Separately, UK house prices increased 8.6 per cent in February compared to the same month a year ago, the highest annual growth rate since October 2014.

It was also up from 8 per cent in January, with the average house price £250,000 in February, indicating no change since December 2020.

However, it was still £20,000 higher than the same period a year ago.

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