UK Inflation to Rise Sharply for Next Six Months, Says Fitch

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UK Inflation to Rise Sharply for Next Six Months, Says Fitch

The rate of UK CPI inflation will rise sharply in the next six months as energy prices jump and global factors push up goods prices. Bank of England official recently warns that inflation could top 5% as UK economy slows down.

But it is the risk of rising inflation expectations, amidst evidence of labour shortages and wage pressures, which will prompt the Bank of England (BOE) to hike rates early, according to Fitch Ratings’ latest economics dashboard.

Following the massive rise in wholesale gas prices, Fitch now expects CPI inflation to rise to 4.3% by the end-2021 and to peak at just over 5% next April. The energy component of CPI inflation is expected to rise by nearly 1pp in the coming months.

Global manufacturing supply-chain pressures will also push up UK core, that is excluding energy, goods inflation. UK manufacturers’ input costs have risen sharply and are being passed through to retail prices. Core goods inflation is expected to rise above 5% year on year.

The shock from energy and core goods is unlikely to be sustained beyond the middle of next year.

But the risk of high headline inflation pushing up medium-term inflation expectations is a bigger concern for the BOE as this could prompt a pick-up in wages and more sustained increases in services inflation. Growing evidence of a tighter labour market is amplifying concerns.

The MPC has signalled that an interest rate hike is imminent in the next few months, much earlier than Fitch expected in September.

But with the change in direction of the policy itself – with QE already scheduled to end this year – likely to be viewed as important in anchoring inflation expectations, fiscal policy set to be tightened and lingering uncertainties about the health of the labour market, we do not see rates rising beyond 50 basis points by the end of 2022. # UK Inflation to Rise Sharply for Next Six Months, Says Fitch

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