UK inflation jumps to 2.5% as secondhand car and food prices rise | Inflation

Britain’s inflation rate has risen to 2.5% – its highest level in almost three years – as a combination of supply shortages and rising demand prompted by the easing of coronavirus lockdown restrictions led to higher prices last month.

The Office for National Statistics (ONS) said dearer food, secondhand cars, clothing, footwear and fuel were the main factors behind a jump in the annual inflation rate from 2.1% to 2.5% in June.

The figure was the highest since the 2.7% recorded in August 2018, higher than the 2.2% expected by analysts and above the Bank of England’s 2% target.

Core inflation, which strips out food, energy, alcohol and tobacco, rose from 2% to 2.3% – also above the expert consensus.

Threadneedle Street policymakers have said they expect rising inflation to be temporary and have signalled it will not trigger an early increase in interest rates from their record low of 0.1%.

According to the ONS, part of the increase in inflation as measured by the consumer prices index was caused by the bounceback in prices after they were depressed during lockdown.

There were also sharp rises in the cost of secondhand cars (up 5.6%) because the supply of new vehicles has been affected by a global shortage of computer chips.

Rising oil prices led to a sharp increase in motoring costs. The annual inflation rate for motor fuels stood at 20.3% in June – its highest since 2010 – after an increase in average petrol prices from 106.5 pence a litre to 129.7 pence a litre over the past 12 months.

Quick Guide

Why is there a global computer chip shortage?

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The global shortage in semiconductors, the microchips that are an essential component in every electronic device in the world, started as a temporary delay in supplies as chip factories shut down when the coronavirus pandemic first hit.

However, while factory production has returned to normal, the shortage has become a global crisis, with a new surge in demand leading to companies fighting to secure the limited supplies coming to the market.

Apple, the world’s biggest buyer of semiconductors – spending $58bn (£41.7bn) annually – was forced to delay the launch of the iPhone 12 by two months last year because of the shortage. Sony has warned it may not hit sales targets for the new PS5 console this year because of chip supply problems, and Samsung, the second biggest producer and consumer of chips in the world, said it might have to postpone the relaunch of its high-end smartphone.

However, the hardest hit sector has been the global automotive industry. Car manufacturers are relative newcomers to the semiconductor industry, as investment in tech-heavy electric vehicles increases, and have found themselves at the back of the supply queue. The biggest automotive players, Toyota and Volkswagen, spend about $4bn annually on chips, making them relative minnows in the supply chain.

Ford has been forced to cancel shifts at two car plants and said profits could be hit by up to $2.5bn this year, Nissan is idling output at some plants in Mexico and the US, and General Motors has warned of a $2bn profit hit.

The battle for chip supplies has also sparked governmental concerns. Earlier this week, Boris Johnson said the UK government would step in to review the purchase of the UK’s largest producer of semiconductors by a Chinese-owned manufacturer, under the new National Security and Investment Act 2021 designed to protect key infrastructure businesses from foreign takeovers.

The shortage is forecast to last until 2023 because new chip factories are highly complex to build and take up to two years to become operational.
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Other contributors to rising inflation included furniture (up 6.6%), women’s clothes (4.3%), bicycles (13%), books (8%) and vet bills (4.2%).

Jonathan Athow, the deputy national statistician for economic statistics at the ONS, said: “The rise was widespread, for example, coming from price increases for food and for secondhand cars where there are reports of increased demand.

“Some of the increase is from temporary effects, for example, rising fuel prices which continue to increase inflation, but much of this is due to prices recovering from lows earlier in the pandemic. An increase in prices for clothing and footwear, compared with the normal seasonal pattern of summer sales, also added to the upward pressure this month.”

Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, said businesses were seeking to take advantage of strong consumer demand after the relaxation of Covid-19 restrictions.

“The rise in the core rate in June was driven by increases in clothing inflation to 3.0%, from 2.1% in May, and catering services inflation to 2.2%, from 1.4%. In addition, a jump in secondhand cars inflation to 5.5%, from 0.9%, boosted the headline rate by 0.08 percentage points.”

Britain is not alone in experiencing stronger price pressures during a period marked by strong post-lockdown growth. Earlier this week, the US reported that its inflation rate had hit a 13-year high of 5.4%. Analysts expect further increases over the coming months, before it starts to come down again.

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Yael Selfin, the chief economist at KPMG UK, said: “While a combination of factors could push inflation further above the Bank of England’s 2% target, as many businesses continue to grapple with rising costs and supply chain shortages, we expect it to peak at around 3% by the end of this year.

“The prospects of cooling inflationary pressures next year, as firms adjust to new levels of demand, should provide the Bank of England with room to keep interest rates unchanged for a while longer.”

Paul Dales, the chief UK economist at Capital Economics, believes rising inflation will be temporary but expects the peak to be 4%.

Bridget Phillipson, the shadow chief secretary to the Treasury, said businesses were struggling to access the supplies and the staff they needed, leading to shortages and higher prices.

“The government must do all it can do to keep materials and other supplies moving to prevent shortages, including cutting the unnecessary red tape following the EU-UK agreement, and providing much better training so that we have access to the skills we need here in the UK,” she said.

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