UK ‘global outlier’ as inflation refuses to fall

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A double whammy of bad news on inflation and the public finances has put the dampeners on Tory hopes for pre-election tax cuts and intensified fears of a mortgage “time bomb” facing many UK households.

Inflation remained at a higher than expected 8.7 per cent in May, according to new data this morning, the fourth month in a row that prices have topped forecasts, but the “core” measure, excluding volatile items such as food and energy prices, rose again from 6.8 per cent to 7.1 per cent.

UK inflation remains much higher than the EU’s 7.1 per cent and the 2.7 per cent in the US. Paul Dales of Capital Economics said the acceleration in the core figure left the UK “looking increasingly like the global outlier and the stagflation nation”. 

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The data heaps pressure on the Bank of England to continue with its interest-rate rising programme tomorrow. Traders expect a rise of at least 0.25 percentage points to 4.75 per cent and predict rates will peak at 6 per cent early next year.

Two-year gilt yields hit 5.1 per cent after the data was released, the highest level since the financial crisis of 2008, before easing slightly. (You can read our explainer here if you want more detail on how the bond market is driving up mortgage rates.) 

Mass home repossessions are unlikely because of higher levels of housing equity and regulatory pressure on lenders, but pressures on households are intense.

First-time buyers are struggling to access mortgages at all as rising interest rates have meant a cut in the number of products for borrowers with small deposits by more than 40 per cent over the past year. Renters too are under strain, with new data today showing annual prices rising at the fastest rate for seven years.

Separate figures this morning showed UK government debt overtaking GDP for the first time in 62 years as borrowing doubled due to the cost of social security benefits and energy support schemes. The higher than expected net total of £20bn was the second-highest for May since monthly records began in 1993.

High inflation and rising mortgage costs have also moved centre stage politically.

Opposition leader Sir Keir Starmer said homeowners with loans had been hit by a “Tory mortgage penalty” of £2,900 a year in extra costs. Today’s data also removes much of the headroom for chancellor Jeremy Hunt to deliver big tax cuts and makes prime minister Rishi Sunak’s pledge to halve inflation to about 5.5 per cent by the end of 2023 that much more difficult.

The FT editorial board concurs with Hunt that the best way of supporting mortgage holders is for the BoE to get inflation back down. It has a chance to show it is getting a grip at its meeting tomorrow, the FT says, but concludes: “Unfortunately for homeowners, things will have to get worse before they get better.”

Compare countries’ performance in detail with our global inflation tracker.

Need to know: UK and Europe economy

Former UK chancellor George Osborne rejected accusations that his austerity policies meant health and social care were in a weakened state as the Covid pandemic hit.

Brussels urged EU members to toughen measures against China such as screening outbound investments after some had questioned the need for tighter rules.

EU states are resisting a request from Brussels for a €66bn budget top-up to cater for rising interest rates, migration-related costs and commitments to Ukraine. Brussels also said there would be no new money available for nature reforms to restore biodiversity.

Need to know: Global economy

India’s prime minister Narendra Modi arrived in the US for a state visit in an attempt to deepen US-India relations, bolstered by rising defence and technology co-operation and the shared goal of countering China.

China cut benchmark lending rates for the first time in almost a year in an effort to spur growth. Economist Tao Wang says Beijing needs to introduce structural changes redefining the roles of the state, as well as a stimulus package.

Qatar struck a second huge gas supply deal with China in the latest example of Beijing rushing to secure long-term energy agreements.

Mafalda Duarte, the new head of the Green Climate Fund, warned the west against inaction on clean energy for the developing world. Chief economics commentator Martin Wolf says these developing economies won’t be able to make the green transition without help for financing.

A new Big Read examines whether Iran’s nuclear weapons ambitions can be halted after five years of dangerous brinkmanship with the US.

Need to know: business

Volkswagen, BMW and Mercedes were accused of using forced labour in their Chinese supply chains in one of the first official complaints under a new German law.

There was more corporate ignominy in the UK, where big retailers such as Marks and Spencer, WHSmith and Argos were named and shamed for failing to pay the minimum wage.

A growing list of US companies are either paying more or abandoning borrowing plans because of the slowdown in the $1.4tn market for junk-rated loans.

Pasta producers in Europe including Barilla and Panzani are in hot water for continuing mark-ups even as wheat prices decline. Columnist Helen Thomas discusses the lack of scrutiny in the murky world of food trading.

The new head of Brazilian state-owned Petrobras said it would be a “fatal error” not to replenish its oil reserves, as it tries to overcome opposition to plans for drilling off the mouth of the Amazon river.

TikTok is expanding online retail, with its Chinese parent company ByteDance selling products through the app in an attempt to challenge etailers such as Shein and Amazon.

Anti ESG funds, designed as alternatives to investing with an eye to environmental, social and governance issues, are losing sales, raising concerns about their long-term viability.

Investor interest in air taxis has waned a little. A big problem is that there’s nowhere to land, the Lex column says. Here’s all you need to know about this (potentially) revolutionary new mode of transport.

The World of Work

Political leaders are happy to talk up the prospect of green jobs but need to match that with solid ideas for market incentives and training and reskilling workers, writes columnist Sarah O’Connor.

Does HR have an image problem? Listen to the Working It podcast.

Some good news

On July 1, New York state’s Right to Repair law will come into effect, requiring manufacturers to make it easier to repair items such as smartphones. The move is likely to have an impact around the world and follows last week’s approval in the European parliament for rules making smartphones feature user-replaceable batteries.

This article has been amended to make clear Narendra Modi is India’s prime minister, not president. We apologize for the error.