Upside risks to inflation as the economy re-opens

The jump in inflation to 3.4% in April was stronger than most forecasters expected and, with firms’ selling price expectations rising again in May, there seem to be further upside risks to inflation over the rest of the year. We expect inflation to average 3.1% over the rest of 2021, which is about 0.5%-points higher than the consensus forecast. Yet even our forecasts imply that non-energy inflation will peak at 2.7% later this summer, which is 1%-point lower than firms’ selling price expectations now seem to suggest. While we would not put all our faith in one survey, there are clear signs that inflationary pressures are rising. The monthly increase in the CPI in April was broad based across every major product category, some commodity prices have risen even further since then, and the latest data show wholesale used car inflation catching up with that in the US. These developments mean there is a risk that even our above-consensus inflation forecasts prove too modest as the economy re-opens.