Britain’s inflation rate remained unchanged in May, contrary to expectations of a slowdown. The Office for National Statistics reported that consumer prices increased by 8.7 percent compared to the previous year, the same as in April. This data raises concerns about the escalating cost of living crisis in the coming months as mortgage holders face the burden of higher interest rates aimed at combating inflation.
The Bank of England is set to raise interest rates for the 13th consecutive time to 4.75 percent, the highest since early 2008, in order to address the persistently strong inflation pressures. Recent wage data showed a faster-than-expected growth in pay. The statistics agency also revealed that core inflation, excluding energy and food prices, rose to 7.1 percent from May of the previous year, the fastest rate since 1992. Services inflation, a key indicator for policymakers, increased to 7.4 percent in May from 6.9 percent in April.
Grant Fitzner, the chief economist at the statistics agency, expressed concern about the rise in core inflation. He attributed this increase to higher prices in service sectors such as restaurants and hotels, primarily driven by elevated wage costs for companies. Fitzner noted the stickiness of service prices, indicating that it may take longer for them to rise but also longer for them to subside. This suggests that overall inflation may decline at a slower pace than it rose.
Britain’s inflation rates have repeatedly defied expectations and remained higher than predicted in recent months. While it has decreased from its peak of 11.1 percent in October, it still remains uncomfortably high. In comparison, inflation in the United States stood at 4 percent in May, and the eurozone reported an average inflation rate of 6.1 percent for the countries using the euro. The Federal Reserve has halted its interest rate hikes, while traders anticipate that the European Central Bank will raise rates only once or twice. However, in Britain, investors predict that the central bank will need to raise rates for a longer duration to combat inflation.
Andrew Bailey, the governor of the Bank of England, acknowledged that policymakers still expect the inflation rate to decrease but admitted that it is taking longer than anticipated. Traders predict that interest rates could reach 6 percent by early next year, evident from the rising yields on government bonds surpassing levels observed during a period of political turbulence last fall.
In response, mortgage rates have also risen. Last weekend, the average rate for a two-year fixed-rate mortgage reached 6 percent for the first time this year. The central bank warned last month that many mortgage holders have yet to experience the impact of higher interest rates. Approximately 1.3 million households are expected to reach the end of their fixed-rate terms by the end of the year. If mortgage rates increase by 3 percentage points, as suggested by mortgage quotes last month, the average mortgage holder in this group could see their monthly interest payments rise by £200 ($255) or £2,400 annually.
The additional financial strain comes after several months of price hikes, from energy bills to groceries. Data revealed that food and nonalcoholic drink prices rose by 18.3 percent in May compared to the previous year. Rising prices in restaurants, hotels, secondhand cars, and live music events contributed to the higher annual inflation rate. This offset a slight slowdown in food inflation and lower fuel costs.
Jeremy Hunt, the chancellor of the Exchequer, expressed concern about the impact of high inflation on families and businesses. He emphasized the government’s commitment to halving the inflation rate as the best strategy to control costs and interest rates. The government, led by Prime Minister Rishi Sunak, previously pledged to achieve this goal by the end of the year, aiming for a rate of approximately 5 percent. However, as the months have progressed, slowing down inflation has proven more challenging than anticipated, putting the fulfillment of this pledge at risk.
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