PA ANALYSIS: Prepare for the ‘new normal’ of rising UK inflation

Added 13th June 2017

Any hopes the Bank of England could soon hike interest rates have been dashed after news of the UK’s soaring inflation emerged on Tuesday, so should we settle in for the ‘new normal’ of an inflationary world?

PA ANALYSIS: Prepare for the ‘new normal’ of rising UK inflation

Even as the Office for National Statistics revealed inflation beat pundits’ predictions and hit 2.9% in May, dwindling economic activity suggested the chances of the central bank adjusting its position on rates looked slimmer than ever.

Commentators had expected inflation to hit 2.7% last month, but the actual figure surprised markets by touching its highest level since April 2014.

Industry consensus shows many believe inflation could hit 3% or more before the BoE feels compelled to act and with only one MPC member, Kristin Forbes, in favour of a rate rise at the April meeting we may be in for a long wait.

Ben Lord, manager of the M&G UK Inflation Linked Corporate Bond Fund, certainly saw no reason why the bank’s governor Mark Carney would increase rates from current historic lows.

He said: “With so little evidence of domestic inflation pressures, and with most inflation coming from ‘transient’ and exogenous forces, Mark Carney will look through CPI at 3%, 4% even 5% perhaps.

"Many believe inflation could hit 3% or more before the BoE feels compelled to act"

“In fact, if Brexit negotiations commence poorly, and if the government can’t get anything done without a workable majority and now with a viable and sizeable opposition, I would still argue that Carney’s last move at the helm may be in the looser direction.”

Viktor Nossek, director of research at WisdomTree in Europe, said the impact of a volatile sterling and a weakening UK economy meant the bank was unlikely to act soon.

"Combined with indications of economic activity weakening, as evidenced by both actual GDP and retail sales decelerating markedly against a backdrop of weakening business sentiment, the BoE is unlikely to tighten soon," he said. 

"It's clearing the path for inflation to hit 3%". 

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Louise joined Portfolio Adviser in December 2016 as one of the editorial team’s news reporters based in London. Originally from Liverpool, she is an NCTJ-qualified journalist and began her career in 2014 working on local newspapers.

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