UK inflation stuck at 8.7%, higher than forecast

UK inflation remained stuck at 8.7 per cent in May, worse than the 8.4 per cent expected, raising pressure on the Bank of England to ramp up interest rates.

The BoE is set to raise rates on Thursday by at least 0.25 percentage points to 4.75 per cent. The odds of a larger 0.5 percentage point rise climbed to around 40 per cent, swaps markets indicated, while traders now predict rates will peak at 6 per cent early next year.

Wednesday’s data marked the fourth month in a row that price rises have exceeded forecasts, adding to the gloom afflicting rate-setters, Rishi Sunak’s government and many households.

Analysts said there was next to no good news in the inflation data. Core inflation, which excludes volatile food and energy prices, rose again in May to 7.1 per cent from 6.8 per cent the previous month, the highest rate since March 1992. Services prices were also up 7.4 per cent, also the highest rate in more than 30 years.

The monthly increase in overall prices of 0.7 per cent in May alone suggests that the current rate of price increases is not slowing down.

Paul Dales, chief UK economist at Capital Economics, said the BoE would have to “fight tougher” to bring down inflation because “the acceleration in core inflation leaves the UK looking increasingly like the global outlier and the stagflation nation”.

Kitty Ussher, chief economist at the Institute of Directors, said the only question for the BoE now was how much to increase the cost of borrowing. She said the failure of inflation to come down was probably caused by “the continuing impact of high energy costs and strong wage pressure being passed through to prices, all overlaid with high demand for leisure activities among households with disposable incomes”.

Two-year gilt yields hit 5.1 per cent in early trade, their highest level since 2008, before easing to 5.03 per cent. The pound fell 0.3 per cent against the dollar to £1.272.

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In the detail of the figures, price rises again easily offset price cuts with significant rises in the cost of air fares, package holidays, live music events, games and toys. These were partially offset by falling prices for petrol and diesel.

Food price inflation dipped from 19 per cent in April to 18.3 per cent in May, but the cost of food itself in supermarkets still rose 0.9 per cent in the month of May alone.

The UK’s inflation rate of 8.7 per cent in May compared poorly with those in other countries. The equivalent figures are 6 per cent in France, 6.3 per cent in Germany, 7.1 per cent across the whole of the EU and 2.7 per cent in the US, using the most comparable measure.

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Chancellor Jeremy Hunt acknowledged the numbers were difficult for families and businesses across the UK and also challenging for the government.

“We will not hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy, while also providing targeted support with the cost of living,” he said.

Adding to fears for the UK outlook, net government debt rose above 100 per cent of gross domestic product for the first time since 1961, separate data on Wednesday showed.