UK Inflation Holds Steady at 8.7% in May, Putting Pressure on the Bank of England

Title: UK Inflation Holds at 8.7% in May, Defying Forecasts of a Slowdown

Subtitle: Core Inflation Reaches Highest Level Since 1992, Putting Pressure on Bank of England

Date: June 21, 2023

LONDON (Reuters) – British inflation remained at 8.7% in May, defying predictions of a slowdown and increasing pressure on the Bank of England (BoE) ahead of its expected interest rate hike. The figures also revealed that core inflation reached its highest level since 1992.

The sustained high inflation rate makes British inflation the fastest among major advanced economies. This poses a challenge for Prime Minister Rishi Sunak, who had pledged to halve inflation this year before the upcoming 2024 election. The persistently high inflation is also expected to contribute to rising mortgage costs for millions of homeowners.

Economists surveyed by Reuters had anticipated a drop in the annual consumer price inflation rate to 8.4% in May, moving further away from the 41-year high of 11.1% recorded in October.

The release of the official figures led to an increase in market expectations of further rate hikes by the BoE. Analysts suggest that the BoE’s Monetary Policy Committee is likely to raise borrowing costs in the coming months. Citi, a financial services company, expects the Bank Rate to peak at 5.25%, up from its previous forecast of 5%.

The unexpected inflation figures caused a brief surge in the value of sterling against the U.S. dollar and the euro. Additionally, two-year government bond yields, which are sensitive to interest rate expectations, reached their highest level since 2008.

Market indicators now suggest a 40% chance of the BoE raising interest rates from 4.5% to 5% on Thursday, with nearly 100% certainty that rates will reach 6% by December, despite the economy’s avoidance of a recession.

Finance Minister Jeremy Hunt emphasized the government’s commitment to reducing inflation and called for increased efforts from mortgage lenders to support this goal. Opposition Labour Party leader Keir Starmer criticized Sunak’s Conservative Party, accusing them of triggering a “mortgage catastrophe.”

In addition to the high inflation figures, data revealed that public sector net debt exceeded 100% of gross domestic product in May for the first time since 1961, despite Sunak’s promise to reduce debt levels.

The Office for National Statistics reported that core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, unexpectedly rose to 7.1% from 6.8%, reaching its highest level since March 1992. Services price inflation, influenced by rapidly rising wages, also reached its highest level since 1992 at 7.4%.

May’s inflation was driven by significant increases in airfares, second-hand car prices, live music events, and video games. However, food and drink price inflation slightly decreased to 18.3% from April’s 19.0%, primarily due to lower prices of milk, cheese, and eggs.

Economists, including those advising Finance Minister Jeremy Hunt, expressed concerns about the BoE’s policy in light of the persistent inflation figures. They suggested that the central bank may need to take more drastic measures, potentially even creating a recession, to curb the emerging wage-price spiral.

Despite the current high inflation, the BoE had previously forecasted a drop to just over 5% by late 2023 and a return to its 2% target in early 2025. The labor market in Britain has not fully recovered to its pre-pandemic size, partly due to long-term sickness and post-Brexit immigration rules that make it challenging for employers to recruit low-paid staff.

There is some hope for lower inflation in the future, as producer price inflation slowed more than expected. Prices charged by manufacturers rose by 2.9% in the 12 months to May, the smallest increase since March 2021.

However, the impact of the BoE’s rate hikes on homeowners will be delayed, as most British mortgages have fixed rates for two or five years. Industry data indicates that 800,000 mortgages are due to be refinanced in the second half of 2023.

Economist James Smith from ING suggested that falling petrol and energy prices would bring inflation below 7% by July. He also disagreed with market expectations of six more rate hikes to reach 6%, stating that such a scenario seems excessive.

In conclusion, the unexpected persistence of high inflation in the UK has put additional pressure on the Bank of England. The government remains committed to reducing inflation, but economists have raised doubts about the effectiveness of the central bank’s policies. The future trajectory of inflation and interest rates will continue to be closely monitored by market participants and policymakers alike.

(Reporting by [Author]; Editing by Catherine Evans)

inflation definition

Article Title: UK Inflation Remains at 8.7% in May, Putting Pressure on Bank of England

Subtitle: Core Inflation Reaches Highest Level Since 1992, Marking Concerns for the Economy

Date: June 21, 2023

LONDON (Reuters) – Despite predictions of a slowdown, British inflation stayed at 8.7% in May, placing increased pressure on the Bank of England (BoE) ahead of its expected interest rate hike. Furthermore, core inflation reached its highest level since 1992.

The steady rate of high inflation sets the UK apart from other major advanced economies and presents a challenge for Prime Minister Rishi Sunak, who aimed to halve inflation before the upcoming 2024 election. Persistently high inflation is also expected to lead to higher mortgage costs for many homeowners.

Economists surveyed by Reuters had expected a decrease in the annual consumer price inflation rate to 8.4% in May, moving further away from the record high of 11.1% recorded in October.

The release of the official figures has raised market expectations for additional rate hikes by the BoE. Analysts suggest that the BoE’s Monetary Policy Committee will likely raise borrowing costs in the coming months. Citi, a financial services company, now predicts the Bank Rate to peak at 5.25%, up from its previous forecast of 5%.

The unexpected inflation data caused a temporary surge in the value of the pound against the U.S. dollar and the euro. Additionally, two-year government bond yields, which are sensitive to interest rate expectations, reached their highest level since 2008.

Market indicators currently suggest a 40% chance of the BoE increasing interest rates from 4.5% to 5% on Thursday, with nearly 100% certainty that rates will reach 6% by December, despite the economy managing to avoid a recession.

Finance Minister Jeremy Hunt has emphasized the government’s commitment to lowering inflation and called for increased efforts from mortgage lenders to support this objective. Opposition Labour Party leader Keir Starmer criticized Sunak’s Conservative Party, accusing them of causing a “mortgage catastrophe.”

In addition to the high inflation figures, data revealed that public sector net debt surpassed 100% of gross domestic product in May for the first time since 1961, despite Sunak’s promise to reduce debt levels.

The Office for National Statistics reported that core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, unexpectedly rose to 7.1% from 6.8%, reaching its highest level since March 1992. Services price inflation, influenced by rapidly rising wages, also reached its highest level since 1992 at 7.4%.

May’s inflation was driven by significant increases in airfares, second-hand car prices, live music events, and video games. However, food and drink price inflation slightly decreased to 18.3% from April’s 19.0%, primarily due to lower