The UK’s inflation rate failed to ease in May, the latest official numbers show, adding to worries that it is becoming entrenched and will force interest rates even higher than expected.
The Office for National Statistics said the consumer prices index (CPI) was 8.7% in the 12 months to May, the same rate as in April. Although this is down from a peak of 11.1% in October, economists had expected it to fall to 8.4% this month
While energy prices have been stabilising, this was offset by sharp increases in the cost of air fares and package holidays. Second-hand cars, live music events and video games also contributed to May’s increase.
UK CPI over 10yrs
Source: ONS
Core inflation – which excludes volatile prices such as food, energy, alcohol and tobacco prices – rose from 6.8% in April to 7.1% in May. This is its highest level since 1992 and adds to concerns that inflation in the UK is proving to be stickier than in other countries.
The latest CPI print comes the day before the Bank of England’s Monetary Policy Committee (MPC) meets to make a decision on interest rates. It is widely expected to hike again, with the only question being by how much.
George Lagarias, chief economist at Mazars, said: “There’s no way to sugar-coat this, 8.7% is a bad number. Inflation has become entrenched and remains high versus other developed market economies.
“This number will compel policymakers, the government and the Bank of England, to further clamp down on consumption in order to break the wage-price spiral. We expect that growth will further decelerate, possibly even pushing the economy past the recession threshold, even as early as the autumn.”
Myron Jobson, senior personal finance analyst at interactive investor, said: “Headline inflation stubbornly dug its heels in last month. It is a real shocker that brings the downward trend in inflation to a screeching halt and poses further headaches for the Bank of England ahead of its interest rate decision.
“Looking past volatile food and energy prices, core inflation rose to its highest level in 31 years, hitting 7.1% - despite the Bank of England’s robust approach to rising rates. With core inflation proving to be hot and stickier than initial forecasts, it now seems odds-on that the Bank of England will hike the base rate further tomorrow. The key question is how much higher will interest rates go in future?”
Luke Bartholomew, senior economist at abrdn, said today’s CPI figures are “certainly ugly enough” to spark debate that the Bank could hike by 50 basis points at this week’s MPC meeting. While a move of this magnitude is not impossible, abrdn thinks a 25 basis point increase is more likely, given the stresses being seen in the mortgage market.
“However, we also think that rates will now need to move above 5% and now pencil in a terminal rate of 5.25% ahead of the Bank’s decision tomorrow,” Bartholomew added.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, also expects a 25 basis point increase at tomorrow’s MPC meeting, although he conceded that the latest inflation figures add pressure for the Bank to hike “substantially further” over the coming months.
“At least the headline rate of CPI inflation still looks set to fall sharply over the remainder of this year, probably to about 4.5% by December and to around 2% in the second half of 2024,” he said.
“All told, we continue to think that the MPC will not raise Bank Rate all the way to the near-6% level priced-in by markets before today’s data; for now, our base case remains bank rate peaks at 5%.”
Charles Hepworth, investment director at GAM Investments, said persistent inflation “is here” and the Bank seems to have little ability to control it despite hiking rates at one of the fastest rates in its history.
“A hike tomorrow of 0.25% is all but guaranteed and after today’s numbers it could even be more,” Hepworth finished.
“The Bank of England finds itself in an unviable position, as hitting consumers with higher rates will slow the economy and push it towards contraction. Being less hawkish only allows this structural post-Brexit inflation issue to metastasize further. This poses impossible choices for policymakers indeed.”