The second factor driving up inflation – and one which has intensified in recent months – is the recovery in internal demand as the economy has reopened after the pandemic. Spending is rotating from goods back to services as restrictions are being lifted, while pent-up demand for tourism and leisure activities is proving unexpectedly strong.
This rebound in spending has seen services inflation rise to 3.5% in May – the highest rate since the mid-1990s – with the highest price increases in contact-intensive sectors. These shocks, in particular the surge in energy prices, are driving up short-term inflation to very high levels. They are also leading to significant upward revisions to our medium-term inflation forecasts.