Inflation exceeds Bank of England target for third consecutive month – could this impact UK exports?

Wed 14 Jul 2021
Posted by: William Barns-Graham
Trade News

inflation

The UK has experienced its third consecutive month of inflation above the Bank of England’s (BOE) target rate of 2%, according to the latest ONS figures.

The FT reports that inflation is being fuelled by businesses trying to quickly rebuild their profits following the easing of coronavirus restrictions.

The UK rate was 2.5% in June, higher than many economists’ prediction of 2.2%.

Food and cars

The ONS has blamed the rise on food price increases and growing demand for second-hand cars.

According to the BBC, the surge of buyers for used vehicles has been caused by the semiconductor supply crisis which has stalled new production in the auto sector.

Peak

The BOE predicts inflation will peak at around 3% later in the year, however, others have said it could go higher before the rate levels out in 2022.

Ruth Gregory, UK economist at Capital Economics, said inflation could peak as high as 4% in 2021.

“We expect it to continue its upward trend over the summer,” she told the BBC. “That’s largely because of these global supply shortages which have become more acute”.

Bottlenecks in supply chains and congestion crises at ports around the world have also contributed to rising prices.

Impact on exports

Rising inflation could increase the cost of goods produced in the UK, making their prices less competitive in export markets.

At the same time, imports could become more attractive to UK consumers if overseas seller prices do not rise at the same rate as UK prices.

This will depend on the rate of UK inflation as compared with other markets and the UK is not alone in experiencing rising prices following the easing of Covid-19 restrictions.

The Independent reports that the US consumer price index was up to an annual rate of 5.4% in June.

Housing boom impact

Soaring inflation in housing prices could also result in difficulties for the country’s exporters, according to analysis in Reuters.

OECD economist Balazs Egert told Reuters that when a particular sector booms, it drains resources away from other sectors, which in turn has a detrimental effect on economic output.

This is because more profitable sectors – in this case real estate and construction – will end up luring labour and capital away from higher-productivity industries such as manufacturing.

"If you have a housing boom, this will (put a) brake on export performance in an average country in which we observed this kind of boom in the past," Egert said.

"Looking at the 1990s and 2000s, then it's probably fair to say that if you have a booming construction sector and real estate sector, then certainly they're not very helpful for ... the manufacturing sector."