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UK inflation remained stuck at 8.7 per cent in May, higher than expectations of a drop to 8.4 per cent, marking the fourth month in a row that price rises have exceeded forecasts.

With the cost of a broad range of goods and services rising sharply, the figures will reinforce expectations of multiple interest rate increases to come from the Bank of England, intensifying the mortgage “time bomb” facing many households.

Two-year gilt yields climbed 0.156 percentage points on Wednesday after the data added to pressure on the BoE to do more to cool rising prices. The two-year gilt yield hit 5.1 per cent in early trade, the highest level since 2008.

The BoE is expected to raise rates again on Thursday with an increase of at least 0.25 percentage points from 4.5 per cent to 4.75 per cent. Following Wednesday’s figures, the odds indicated by swaps markets of a larger 0.5 percentage point rise climbed to around 40 per cent.

Traders are now betting that UK interest rates will peak at 6 per cent by early next year. 

Analysts said there was next to no good news in the inflation data. Core inflation, which excludes volatile food and energy prices, rose again in May to 7.1 per cent from 6.8 per cent the previous month, the highest rate since March 1992. Services prices were also up 7.4 per cent, also the highest rate in more than 30 years.

The monthly increase in overall prices of 0.7 per cent in May alone suggests that the current rate of price increases is not slowing down.

Paul Dales, chief UK economist at Capital Economics, said the BoE would have to “fight tougher” to bring down inflation because, “the acceleration in core inflation leaves the UK looking increasingly like the global outlier and the stagflation nation”.

Kitty Ussher, chief economist at the Institute of Directors, said the only question for the BoE now was how much to increase the cost of borrowing. She said the failure of inflation to come down was probably caused by “the continuing impact of high energy costs and strong wage pressure being passed through to prices, all overlaid with high demand for leisure activities among households with disposable incomes”.

In the detail of the figures, price rises again easily offset price cuts with significant rises in the cost of air fares, package holidays, live music events, games and toys. These were partially offset by falling prices for petrol and diesel.

Food price inflation dipped from 19 per cent in April to 18.3 per cent in May, but the cost of food itself in supermarkets still rose 0.9 per cent in the month of May alone.

The UK’s inflation rate of 8.7 per cent in May compared poorly with those in other countries. The equivalent figures are 6 per cent in France, 6.3 per cent in Germany, 7.1 per cent across the whole of the EU and 2.7 per cent in the US, using the most comparable measure.

Chancellor Jeremy Hunt acknowledged the numbers were difficult for families and businesses across the UK and also challenging for the government.

“We will not hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy, while also providing targeted support with the cost of living,” he said.

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