Why the UK's 2.5% inflation is a big deal

After years of inflation being a financial-assets problem, it is now an “ordinary things” problem too, says Merryn Somerset Webb. But central banks still insist it is transitory.

Fans in flags outside the London Olympics
The London Olympics: still expensive, but much cheaper than Tokyo’s
(Image credit: © GABRIEL BOUYS/AFP/GettyImages)

In May, annual inflation in the UK as measured by the CPI (consumer price index) rose to 2.5%. This doesn’t sound very much, and it shouldn’t be much of a shock to regular readers: we’ve been worrying about inflation for some time. But that doesn’t mean it isn’t a big deal. It’s higher than most analysts expected for the third consecutive month (the consensus forecast was 2.2%) and the highest since 2018. It is 25% higher than the Bank of England’s target (2%) and six times higher than it was in February. Note also that our old measure of inflation, the RPI (retail price index), is 3.9%. The problem is not confined to the UK: in the US, CPI is rising at 5.4% a year.

This matters. Central banks still insist it is transitory – the base effects of last year’s falling prices working their way out of the system. But it could easily be more: as Capital Economics notes, in the UK “the rises are bigger than the base arithmetic would suggest which means that genuine price inflation is happening too”. How much? The Bank of England reckons it will top out at 3%. Capital says 4%. Both look low to us, given how much inflation you can see around you. You can see it in labour shortages (next week’s podcast guest Brian Pellegrini says that workers have “repriced their leisure”, so employers have to reprice their work). You can see it in the art market (see this week's magazine for the £8.9m just paid for a Leonardo da Vinci sketch and the near-£3m for a 1970 Patek Philippe watch). You can see it in house prices. You can see it in equity prices – the S&P 500 hit yet another record on Wednesday.

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Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.