UK Inflation Stuck at 8.7% in May, Putting Pressure on Bank of England

The UK’s inflation rate remained at 8.7% in May, exceeding expectations and increasing pressure on the Bank of England to raise interest rates. This marks the fourth consecutive month in which prices have surpassed forecasts, causing concerns for various sectors of the economy.

Anticipation of Interest Rate Hike

The Bank of England is scheduled to announce an interest rate increase of at least 0.25 percentage points to 4.75% on Thursday. However, traders are now estimating a 40% chance of a more significant hike of over 0.5 percentage points, with expectations of rates reaching a peak of 6% early next year. Despite the anticipated rate hike, the pound fell 0.4% against the dollar to $1.271, reflecting growing concerns of a recession.

Lyn Graham Taylor, senior rate strategist for Rabobank, expressed the view that the UK has an inflation problem not associated with economic growth. The market believes that the Bank of England may have to push the country into a recession in order to tackle this issue.

No Good News in Inflation Data

Analysts highlight the absence of positive news in the inflation data. Core inflation, which excludes food and energy price volatility, rose to 7.1% in May from 6.8% the previous month, marking the highest rate since March 1992. Prices of services also increased by 7.4%, the highest rate in over 30 years.

Challenges for Various Sectors

The article highlights the challenges faced by taxi drivers, Rishi Sunak’s government, and households due to the persistent increase in prices. Inflationary pressure has impacted a range of sectors, including transportation, leisure activities, and essential goods.

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Implications for the Economy

Despite expectations of higher interest rates, there are growing concerns about the UK’s economic outlook. The monthly price increase of 0.7% in May alone indicates that the rate of price increases is not slowing down. Paul Dales, UK chief economist at Capital Economics, argues that the Bank of England should “fight harder” to bring down inflation, as rising core inflation makes the country increasingly resemble the anomaly of stagflation.

Kitty Ussher, chief economist at the Institute of Directors, believes that the only question for the Bank of England is the extent to which it should raise borrowing costs. Ussher suggests that the failure of inflation to fall is likely due to high energy costs, strong price-driven wage pressures, and increased demand for leisure activities among households with disposable income.

The rise in two-year gilt yields to 5.1% in early trades, the highest level since 2008, before falling slightly to 5.03%, further illustrates the challenges faced by the UK economy.

The Impact on Prices

Price hikes continue to outweigh price cuts, with significant increases seen in the cost of airfares, vacation packages, live music events, games, and toys. These increases were partially offset by the decline in petrol and diesel prices.

In May, food price inflation decreased from 19% to 18.3%, but the cost of food in supermarkets alone increased by 0.9%. This highlights the complexity of the current inflation situation.

Comparison with Other Countries

When compared to other countries, the UK’s inflation rate of 8.7% in May is significantly higher. France has an inflation rate of 6%, Germany 6.3%, the European Union 7.1%, and the US 2.7% (using the most comparable measure).