Expect higher interest rates after the UK inflation shock

Interest rates are expected to rise again after figures revealed that inflation remained stubbornly high.

Inflation, which measures the pace of price rises, was 8.7% in the year through May, the same rate as in April.

Soaring prices for flights and used cars add up to an unexpected number, but the cost of food and energy has already hit family budgets hard.

Interest rates are widely expected to rise 0.25% to 4.75% on Thursday, but some suggest they could now rise to 5%.

The bank is mandated to keep inflation at 2% but the current inflation rate is four times higher than that.

The Bank of England has been steadily raising interest rates since the end of 2021. This makes borrowing money more expensive and theoretically encourages people to borrow less and spend less, which means that rate hikes should be mitigated.

This has led to concerns about loans, particularly mortgages, as homeowners – a third of UK adults – face steep increases in repayments when term deals expire. First-time buyers are also at risk of being left out of the market as lending conditions get tougher.

The average two-year mortgage, Wednesday, was 6.15%, and five-year deals were 5.79%.

On Thursday, Chancellor Jeremy Hunt appeared to be in favor of further interest rate increases saying he would “not waver in our intention to prop up the Bank of England as it seeks to drive inflation out of our economy”.

Labour’s shadow chancellor, Rachel Reeves, blamed the Conservative government for failing to “get a grip” on inflation.

Danny Hewson, head of financial analysis at AJ Bell, said the latest inflation figures could have sent a bit of a shudder even among the most diehard spectators of the economy.

“Inflation was expected to decline – at least a little bit – but it did not obligate it to do so, it held firmly and boosted the possibility of a rate hike,” she said.

Karen Ward, a member of Mr. Hunt’s economic advisory board and chief market strategist at JP Morgan Asset Management, said the bank needed to “create a recession” to curb higher rates, arguing that it was “extremely reluctant” to raise rates. far.

Ms. Ward said there were indications that higher wages were helping to drive up prices.

She said it was necessary for the bank to “create uncertainty and vulnerability” in the economy to stop prices from rising quickly.

“It’s only when companies are nervous about the future that they’ll think ‘Well, I probably won’t take this price hike’, or workers, when they’re a little less confident about their jobs, think ‘Oh, I’m not going to pay my boss for that higher salary’.” .

But Andrew Seeley, chief executive of Bidfood UK, a wholesale food supplier, said increasing rates was “not the right thing to do”.

“It’s suffocating the economy. They need to look for other ways to support business so they can weather the storm,” he said.

One of the key figures the bank analyzes when deciding on interest rates is what’s called “core” inflation, which excludes direct energy and food prices, along with alcohol and tobacco.

Core inflation was 7.1% in the 12 months through May, up from 6.8% in April and is now at its highest level since March 1992.

Grant Fitzner, chief economist at the Office for National Statistics (ONS), which produces figures on the British economy, said the increase was driven by higher prices for services in cafes, restaurants and hotels.

He added, “It may have been driven, at least in part, by the increase in wages we’ve seen.”

Yael Selvin, chief economist at KPMG UK, said: “Rising core inflation suggests that companies may be passing on the increased costs of higher wage bills to consumers.”

UK wages have risen at their fastest rate in 20 years, barring the pandemic, but still lag behind the rate of inflation.

This is a grim number. Inflation isn’t just stubborn or sticky. It is, in the latest numbers, stuck. Those numbers should be dropping now, and they are in other countries like the US and Germany.

My inbox was flooded with instant snapshots at 7am ranging from “unfortunate” to “difficult” to “catastrophic.”

Wednesday’s figure shows that the already difficult balance between inflation and recession is getting worse. It may take more than just the Bank of England to do the heavy lifting.

Failing to keep up with rising prices has left many families under financial stress in recent months.

Food inflation, the rate at which grocery prices rose compared to a year earlier, was 18.3% in May, down slightly from 19% in April.

Sergio Ronga, owner of Nanninella Pizzeria in Brighton, said he had to raise his prices as a result of rising costs.

He said his ingredient costs have soared as the price of tomatoes has nearly doubled, the price of flour has jumped 60% and cheese has jumped 50%.

Sarah Coles, head of personal finance at Hargreaves Lansdowne, said that while food inflation has eased, it remains at a level that is “perpetually tormenting”.

“Costs have gone up so far, so quickly that we will never see prices fall back to the level we are used to. In many cases, we will not see them actually go down at all: the cost of prices will increase at a slower rate.”

Separately, figures released on Wednesday also revealed that the national debt was greater than the UK’s economic output for the first time since 1961.