Inflation in Britain held steady in May, frustrating expectations that price increases would slow, according to data released Wednesday, the day before the country’s central bank is widely expected to raise interest rates again.
Consumer prices rose 8.7 percent from a year earlier, the same amount as in April, the Office for National Statistics said. Economists had predicted that prices would fall slightly. The data is likely to heighten concerns that Britain’s cost-of-living crisis will intensify in the coming months as mortgage holders must brave the burden of higher interest rates pushed through to deal with stubbornly strong inflation.
The Bank of England is expected to raise interest rates for the thirteenth consecutive time on Thursday, by a quarter of a point to 4.75%, the highest since early 2008.
Last week’s wage data showed that wages grew faster than expected. On Wednesday, the statistics agency said core inflation, which excludes energy and food prices and is used to assess how deeply embedded inflation is in an economy, rose to 7.1 percent over the year through May, the fastest rate since 1992. Services inflation, an indicator policymakers are watching closely, rose to 7.4 percent, from 6.9 percent in April.
“The overwhelming impression is that this is a disappointing set of numbers that demonstrates broad-based strength” in pricing, Sandra Horsfield, an economist at Investec, wrote in a note to analysts. “This just isn’t good enough.”
The rise in core inflation is “something that may be cause for some concern,” Grant Fitzner, the statistics office’s chief economist, told the BBC.
That’s because it has been driven up by price increases in services, such as in restaurants and hotels, much of which reflects higher labor costs for companies, said Mr. Fitzner. “The prices of services are quite sticky,” he said. “It may take longer for them to pick up, but also longer for them to relax.”
This leads to concerns that headline inflation will fall much more slowly than rise, he added.
And that is what Britain is experiencing, as inflation data over the past few months has repeatedly beat expectations and stayed higher than forecast.
UK headline inflation has slowed from a peak of 11.1% in October, but is still uncomfortably high, especially compared to its international peers. In the United States, the consumer price index rose 4 percent in May from a year earlier, and in the eurozone inflation last month averaged 6.1 percent for the 20 countries that use the euro. The Federal Reserve has paused its rate hikes and traders are betting that the European Central Bank will raise rates just one or two more times; in Britain, however, investors are predicting that the central bank will be forced to raise interest rates for longer to curb inflation.
“We are now in a situation where markets are saying they have lost confidence, and that requires a strong response from the bank,” said Andrew Goodwin, an economist at Oxford Economics. The central bank “must recognize that the game has changed,” he said, adding that he wouldn’t be surprised if the central bank raised interest rates by half a point on Thursday.
Andrew Bailey, the governor of the Bank of England, said last week that policymakers still expected inflation to fall, but “it is taking much longer than expected”.
The predecessor of Mr. Bailey, Mark Carney, recently said Britain’s departure from the European Union was part of the reason Britain suffered from stubbornly high inflation. At the same time, there were other economic shocks, such as rising energy prices after Russia’s invasion of Ukraine, but Brexit is a “unique” part of the adjustment that will take years to resolve, he said.
“We explained ahead of Brexit that this will be a negative supply shock for a period of time, and the result will be a weaker pound, higher inflation and weaker growth,” he told The Daily Telegraph last week.
Traders are betting that the Bank of England interest rate could hit 6 percent early next year. These expectations are reflected in rising government bond yields, which have now surpassed the levels reached during Liz Truss’s brief but turbulent tenure as Prime Minister last fall.
In response, mortgage rates are also rising. Last weekend, the average interest rate for a two-year, fixed-rate mortgage reached 6 percent for the first time this year.
Last month, the central bank warned that many mortgage holders had not yet experienced the costs of higher interest rates. By the end of the year, about 1.3 million households are expected to reach the end of their fixed-rate period, which will see the interest rate on their loan revised. And the average mortgagee in that group will see their monthly interest payments rise by around £200 ($255) a month, or £2,400 over the course of a year, if their mortgage rates rise by three percentage points, which is what mortgage quotes suggested last month, the Bank.
The additional financial pressure follows months of higher prices, from utility bills to groceries. Food and nonalcoholic beverage prices rose 18.3 percent in May from a year earlier, data showed on Wednesday, a slight slowdown from previous months when food inflation hit a 45-year high. The moderation in food and fuel prices was offset by rising prices in restaurants and hotels and for used cars and live music events.
“We know how much high inflation is hurting families and businesses across the country,” Treasury chancellor Jeremy Hunt said in a statement Wednesday. He added that the government’s plan to cut inflation in half would be the best way to keep costs and interest rates low.
“We will not hesitate to support the Bank of England in its effort to squeeze inflation out of our economy,” he said.
In January, the government, led by Prime Minister Rishi Sunak, pledged to halve inflation by the end of the year, amounting to around 5 percent, amid waves of strikes in the public and private sectors by workers frustrated by the falling standard of living.
When that promise was made, it seemed almost guaranteed to succeed based on economic forecasts. But as the months progress, inflation has become harder to slow than expected, and that commitment is now in danger of being broken.
Adding to the government’s challenges, separate data released on Wednesday estimated that Britain’s public debt exceeded 100 percent of gross domestic product for the first time since 1961 as the government paid more money into energy support programs and social benefits to reduce costs . life crisis.
