Inflation rises to 1pc as pent-up demand pushes up prices

Linda J. Dodson

As a result inflation rose unexpectedly last month. Overall consumer prices rose by 1pc compared with July 2019, firmly below the Bank of England’s 2pc target, but higher than anticipated and the steepest increase since March.

It could raise difficult questions for the Bank as officials work out how best to support the economic recovery.

If the rise in prices indicates that the nation’s productive capacity has been damaged by the pandemic, then inflation risks taking off and it may need to hit the brakes with a rise in interest rates.

However if this is only a temporary phenomenon unleashed by pent-up demand from the end of lockdown, then it may have little to fear and can keep rates at rock-bottom levels.

“Granted, the Covid-19 effects are injecting a lot of volatility into the numbers, and it’s possible that some of the discounting in clothing and furniture has simply been delayed rather than called off,” said Chris Hare, economist at HSBC.

“But if underlying demand is propping up prices by more than we had anticipated, and if that support persists, then the underlying inflation outlook might prove less muted than we had previously thought.”

That could mean the Bank of England putting policy on hold instead of cutting interest rates further or ramping up quantitative easing, he said.

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