UK inflation remains stubbornly high at 8.7%, surpassing initial predictions

In May, UK inflation remained stagnant at 8.7 per cent, which was worse than the expected 8.4 per cent. This has put pressure on the Bank of England to increase interest rates. This marks the fourth consecutive month where price increases have exceeded forecasts, further adding to the uncertainty faced by rate-setters, the government, and households.

The Bank of England is expected to raise rates by at least 0.25 percentage points to 4.75 per cent on Thursday. However, traders believe there is a 40 per cent chance of a larger 0.5 percentage point rise and predict that rates will reach a peak of 6 per cent early next year. Despite these expectations, the value of sterling fell 0.4 per cent against the dollar to $1.271, as recession fears grew.

Lyn Graham Taylor, a senior rates strategist for Rabobank, expressed concerns over the situation, stating, “We have an inflation problem that is not associated with economic growth. The market is saying that the Bank of England will have to push the UK economy into recession to get on top of this problem.”

Analysts have found little good news in the inflation data. Core inflation, which excludes volatile food and energy prices, rose to 7.1 per cent in May from 6.8 per cent the previous month, the highest rate since March 1992. Service prices also saw a significant increase of 7.4 per cent, the highest rate in over 30 years.

The 0.7 per cent increase in overall prices in May alone suggests that the current rate of price increases is not slowing down. Paul Dales, chief UK economist at Capital Economics, believes that the Bank of England will have to work harder to bring down inflation as the country is increasingly seen as a global outlier and a nation experiencing stagflation.

Kitty Ussher, chief economist at the Institute of Directors, believes that the only question for the Bank of England now is how much to increase the cost of borrowing. She suggests that the failure of inflation to come down may be due to the continuing impact of high energy costs, strong wage pressure being passed on to prices, and high demand for leisure activities among households with disposable incomes.

In early trade, two-year gilt yields hit 5.1 per cent, the highest level since 2008, before easing to 5.03 per cent.

Looking closely at the figures, the rise in prices easily outweighed any price cuts due to significant increases in the cost of air fares, package holidays, live music events, games, and toys. These increases were partially offset by falling prices for petrol and diesel.

Although food price inflation dipped from 19 per cent in April to 18.3 per cent in May, the cost of food in supermarkets still rose by 0.9 per cent in May alone.

When compared to other countries, the UK’s inflation rate of 8.7 per cent in May is higher. The equivalent figures in France and Germany are 6 per cent and 6.3 per cent, respectively. Across the whole of the EU, the rate is 7.1 per cent, and in the US, it is 2.7 per cent, using the most comparable measure.

Chancellor Jeremy Hunt acknowledged the challenges faced by families, businesses, and the government in light of these numbers. He expressed support for the Bank of England’s efforts to combat inflation, while also providing targeted support with the cost of living. Additionally, separate data released on Wednesday showed that net government debt had risen above 100 per cent of gross domestic product for the first time since 1961, further fueling concerns about the UK’s outlook.

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