UK inflation rises to 2.5% in June 2021

• UK inflation rose to 2.5% in June 2021, the highest rate in nearly three years.
• Sharp rise in UK inflation primarily down to increasing transport and food costs.
• US inflation surged to a 13-year high of 5.4% in June 2021, triggering a rise in the US dollar (USD) and tech stocks.
• US inflation news could push the US dollar to the Japanese yen (USD/JPY) exchange rate higher.
• British pound to US dollar (GBP/USD) is likely to remain volatile.
• The US dollar (USD) hit a 3-month high against the euro (EUR).

New data reveals that UK inflation increased to 2.5% in the 12 months to June 2021, surpassing the Bank of England’s (BoE) 2% target rate for a second consecutive month.

The Office for National Statistics (ONS) confirmed the UK consumer price index (CPI) surged due to rising food and transport costs, marking the highest UK inflation increase in almost three years.

Although UK inflation has slightly edged above the BoE’s target rate, their outgoing Chief Economist Andy Haldane stated that UK inflation could rise to 4% by the end of 2021. However, other economist’s views are not so severe. For example, Yael Selfin, chief economist at KPMG UK, said that various factors could continue to push UK inflation above the BoE’s target and would likely peak to 3% at the end of 2021.

While the rising costs in the UK may seem alarming, prices of food and transport last year took a hit due to the coronavirus pandemic, making the price difference today seem larger. In addition, new car prices experienced a surge due to the supply of new vehicles impacted by a worldwide shortage of computer chips.

In addition to food and motor fuel, clothing and dining out also increased following the easing of COVID restrictions in the UK. On the contrary, games, toys and hobbies all fell from last year when the UK was under strict lockdown measures.

The UK’s recent inflation increase was higher than the 2.2% that economists had predicted, leading many to question if UK interest rates will be raised sooner than anticipated. However, according to Dan Hanson from Bloomberg economics, UK price gains will return below the inflation target by spring 2022.

The BoE has labelled the recent UK inflation increases as transitory and highlighted that it is a natural occurrence after experiencing a period of financial devastation. However, with the Bank yet to comment on rising UK inflation, investors are eager to hear their responses which will dictate the course of the British pound (GBP).

It’s reported that the BoE expected there to be ‘bumps’ in the UK economy following the reopening of non-essential businesses.

Deputy Governor for Financial Stability Jon Cunliffe stated that the reopening of any economy could not be expected to be smooth, with intense bursts of consumer demand likely to impact the costs of goods and services.

Mr Cunliffe went on to say that the current burst of consumer demand will likely die down, giving supply chains a chance to recover and the UK economy to return to normal functioning.

The UK economy is likely to see consumer demand escalate further as UK Prime Minister Boris Johnson lifts all COVID restrictions in the UK, seeing the reopening of nightclubs and live events.

US inflation surges to a 13-year high of 5.4%

The US has also experienced a surge in inflation, rising to a 13-year high of 5.4% from 12 months to June 2021. The US Labor Department confirmed that US consumer prices rose 0.9% in June 2021 due to skyrocketing fuel costs, which surged 45% and everyday food items such as bacon, apples and bread increasing by 8%, 6.5% and 2%, respectively.

In a similar pattern to the UK, US price rises are primarily a result of pent-up demand during the coronavirus pandemic. However, price rises are also partially down to supply chain blockages, with other countries struggling with COVID-19 not producing their usual amount of goods.

There are also concerns that the Federal Reserve will raise interest rates even sooner than expected, leading to fears that the action could derail US economic recovery. The Fed slashed interest rates to near zero in response to the coronavirus pandemic last year, and it’s now believed that policymakers will need to hike interest rates to rein in inflation imminently.

The Fed initially stated that US interest rates would not be hiked until 2023, though it now appears that this will likely occur in 2022.

Echoing comments from the BoE, the Fed and Biden administration have labelled rising US inflation as a temporary response to supply chain and economic disruptions.

The US has seen a particularly sharp rise in citizens purchasing used cars, which saw a 10.5% increase in June 2021 alone, which is the most significant monthly increase on record.

David Kelly, the chief global strategist at JPMorgan, said US economic recovery could slow down over the coming months, thus easing inflation levels. That being said, the US economy remains on course to soon make a full recovery, with consumer demand likely to stay strong.

Larry Summers, the former US Treasury Secretary, warned that many could be underestimating inflation risks, highlighting how markets lagged when US inflation skyrocketed in the 1960s.

Elsa Lignos, Global Head of FX Strategy at RBC Capital Markets, stated that economists are no longer concerned with whether US inflation has peaked but how long the price pressures are likely to occur.

Chair of the Federal Reserve, Jerome Powell, stated that a more accurate picture of US inflation would come into focus with more time and data, with the Bank keeping a close watch in the meantime. US dollar (USD) investors will look towards Mr Powell’s semi-annual testimony before Congress, taking place Wednesday and Thursday this week to further indicate tapering US stimulus measures.

US inflation news could push the USD/JPY higher

The US dollar to Japanese yen (USD/JPY) exchange rate recovered from last week’s lows and now stands to make an advance following rising US inflation news. As a result, the currency pairing rose to a weekly high of JPY 110.70, though it has since retreated to 110.51.

Tight monetary policy from the Federal Reserve coupled with the dovishness of the Bank of Japan (BoJ) is likely to see the currency pairing edge higher. However, slowed economic growth in China could see the Japanese yen (JPY) better supported.

Meanwhile, the British pound to USD dollar (GBP/USD) is likely to remain volatile following the recent inflation data. The currency pairing has not yet reacted to inflation headlines, still lingering around the USD 1.38 mark. The direction of cable will be driven by follow-up comments from the BoE, who are yet to release a response. This week also sees the release of employment data for the UK and UK, impacting the currency pairing further.

The Greenback has reached a three-month high against the euro (EUR), reaching USD 1.17720, the highest level since 5th April 2021. The direction of the euro to US dollar (EUR/USD) exchange rate will be dependent on the hawkishness of Mr Powell’s comments later today.

Ahead of the Fed’s semi-annual testimony, the US dollar (USD) also edged higher by 0.1% against the New Zealand dollar (NZD), rising to NZD 0.6984, a low not seen for the ‘Kiwi’ currency since November 2020. However, the New Zealand dollar (NZD) has since followed advanced news that the Reserve Bank of New Zealand (RBNZ) would end its asset-purchase program.

The RBNZ said they forecast New Zealand inflation to spike higher but that it would be down to one-off issues such as rising oil prices or temporary occurrences relating to the coronavirus pandemic, such as supply gaps and rising transport costs.

New Zealand is now the first G10 Central Bank to halt its stimulus measures, signifying that the ‘Kiwi’ economy is rising and strengthening sentiment for the New Zealand dollar (NZD).

Tech stocks expected to rise following US inflation rise

The news of rising US inflation has rattled stock markets, with the S&P 500 index falling 0.4% and the Dow Jones Industrial Average dropping 0.3% to 34,888.79.

Rob Carnell, ING’s Asia-Pacific head of research, said that rising US inflation was not positive news for emerging Asia. However, the expansion of the US economy looks to bode well for US technology firms who are expected to see rapid sales growth through to 2023.

Although there is likely to be market volatility if the Fed makes a sudden change to US monetary policy, the disruption is expected to be short-lived.

The largest tech stocks within the Russell 1000 Index include Facebook, Amazon, Apple, Netflix, Google and Alphabet, all of whom are set to see significant sales growth over the coming years.

However, tech companies who are likely to see the most significant sales growth through to 2023 include Square Inc (40%), Tesla Inc (38.59%), Uber Technologies Inc (35.99%), Zoom Video Communications Inc (31.46%) and Micron Technology Inc (30.21%).

The FTSE 100 has taken a hit from UK inflation news, currently down by 30 points at the start of today’s trading session. Market analyst Joshua Mahony at IG stated that the rise of the Delta COVID variant in the UK also places further pressure on UK stocks.