City and Bank at odds over rates as inflation rockets beyond 2% target

THE Bank of England was today heading for a clash with the City over interest rates after inflation rocketed past the 2% target for the first time in nearly two years.

Fears are rising that inflation is heading out of control and that the Bank, which insists the price rises are temporary, isn’t moving quickly enough.

Rates are locked at record lows of 0.1%, a move to boost lending and get the economy moving.

Figures today show consumer price inflation (CPI) leapt from 1.5% in April to 2.1% in May as surging costs of fuel, clothes and eating out pushed up prices.

The Bank, led by governor Andrew Bailey, is increasingly at odds with City experts who worry that inflation could quickly spiral unless Threadneedle Street moves to reduce quantitative easing — money printing that shoves cash into the economy — and raise rates.

It is supposed to keep inflation at 2%, a target it has undershot while the pandemic raged. Today’s rise was far higher than the City expected, forcing even the most sanguine commentators to adjust their positions.

Paul Dales at Capital Economics was yesterday arguing that interest rates wouldn’t rise above their 0.1% low until 2024. Today he said: “There is a greater level of uncertainty about prices at present, with a possibility that inflation will turn out to be higher if staff shortages persist, triggering stronger wage rises, while cost increases continue to be passed on to consumers.

“However, with price pressures expected to ease next year and inflation to stabilise around 2%, it is likely that the Bank of England will hold fire and not raise interest rates before 2023.”

Inflation in the US is already at 5% and there is concern the world’s most powerful economy is “exporting” price rises.

Allan Monks, UK economist at JPMorgan, noted how fashion, recreation and hotels and restaurants fuelled the boom.

He said: “This is clearest sign yet that the domestic reopening has led to significant pricing pressures, and momentum here looks to have further to run.” Calling that a “surprise”, he said JPMorgan had now upped its CPI forecast to peak at 3.3% in November.

The timing of the data’s collection meant some of price gains from the May reopening may not show up until July.

The pound rose against the dollar to $1.41 as the figures emerged.

Paul Craig, portfolio manager at Quilter Investors, said: “Unfortunately, much of the inflation that is coming through is hitting lower income households in the pocket.

“How long these price rises continue remains to be seen.

“Will inflationary pressures be self-defeating or resolved as pent-up demand dissipates or is met with increasing supply? Should it become sustained then it risks making the recovery even more uneven.”

There is a greater level of uncertainty about prices at present, with a possibility inflation will turn out higher Paul Dales, Capital Economics