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A year of falling inflation

Inflation is rising. The Bank of England forecasts that the CPI inflation rate will hit 6 per cent in April, thanks largely to higher gas prices and to some price falls last January dropping out of the annual data.

The gilt market, however, is relaxed about this. Although five-year yields have risen significantly since last year’s lockdown, they are still only at the levels we saw in early 2019 when nobody was much worried about inflation. There’s a reason for this. It’s that inflation is likely to fall from the spring onwards.

Simple maths tells us this. From next spring onwards some price rises will drop out of the annual inflation data, such as petrol price hikes, the rise in VAT on hospitality and (eventually) higher gas prices. This will leave us with a higher price level, but a lower inflation rate.

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