UK interest rates expected to hit 6% after shock rise in core inflation – business live

Food price inflation has eased in May, but products still cost much more than a year ago.

The inflation rate for food and non-alcoholic beverages dropped to 18.3% in the year to May, down from 19% in April.

During May alone, food and non-alcoholic drink prices rose by 0.9% between April and May 2023, compared with a larger 1.5% increase between the same two months a year ago.

Helen Dickinson, chief executive of the British Retail Consortium, says:

“It is a really positive sign that food inflation has fallen for the second consecutive month, the first time this has happened since the Ukraine war began.

While some prices continue to rise, we are now seeing regular news reports of falling prices on many essential products, such as loo rolls and vegetable oil. It has been good to see larger drops in inflation rates for flour, milk and eggs as retailers continue to invest heavily in lower prices for the future and locking the price of many essentials, helping the UK to deliver some of the cheapest groceries in Europe.

Elsewhere, consumers will find themselves under pressure from increased health and communication costs, as inflation rates in both categories rose in May.

Grant Fitzner, the chief economist at the Office for National Statistics, says rising wages are fuelling the worrying increase in core inflation in May, to 7.1%.

Speaking on Radio 4’s Today programme, Fitzner confirms that headline inflation rate was unchanged in May at 8.7%, but adds:

In terms of what’s under the bonnet, something that may cause some concern is the continuing rise in core inflation.

That excludes food, energy, alcohol and tobacco, which has risen to 7.1%, the highest annual rate in core inflation since March 1992.

Fitzner explains that while goods inflation has been heading downwards, prices in the services sector – such as at cafes, restaurants and hotels – are rising at a faster pace.

That lifted services sector inflation to 7.4% (from 6.9% in April), which is the highest rate “in quite a while”.

This increase is probably driven at least in part by increases in wages, Fitzner suggests. [data last week showed regular pay increased by 7.2% in the three months to April, a 20-year high].

Worryingly, core inflation in the UK has risen.

If you strip out volatile factors such as food and energy, underlying inflation increased to 7.1% per year in May, up from 6.8% in April, and higher than expected.

That’s highest rate of core inflation since March 1992, which will alarm the Bank of England.

Newsflash: UK inflation was unchanged last month, bringing little relief to struggling households.

The Consumer Prices Index shows prices rose by 8.7% in the year to May, matching the 8.7% recorded in April, the Office for National Statistics has reported.

That is higher than the 8.4% inflation rate forecast by City economists, and adds more pressure onto the Bank of England to keep raising interest rates.

Since peaking at 11.1% in October, inflation has dropped a little – but remains over four times above the BoE’s 25 target.

The data comes as the government is under growing pressure to intervene to help millions of households facing a “ticking timebomb” of higher mortgage payments ahead of the next election.

Pay awards by British employers remained the highest in more than 30 years in the three months to May, keeping pressure on the Bank of England to raise interest rates again on Thursday.

Human resources data firm XpertHR said the median basic pay settlement in the March-May quarter remained at 6%.

That matches the record increases seen in the five rolling quarters before but well below inflation which stood at 8.7% in April (we’ll find out May’s inflation rate in just a moment…..)

Wednesday’s data includes pay awards agreed in April, a key month for pay deals between employers and workers.

Sheila Attwood, senior content manager at XpertHR, explains:

“Although inflation is beginning to fall as we enter the second half of this year, it still lies far ahead of pay rises, meaning employees will remain grappling with the effects of a real-terms pay cut.”

Today is “crunch time”, says our economics editor Larry Elliott, who believes today’s inflation bulletin could be the most significant piece of government data published this year.

Larry explains:

It is crunch time for Rishi Sunak and Jeremy Hunt, who want voters to judge the government by the progress it makes in tackling inflation and calming the markets. Halving inflation during 2023 was one of the five new year pledges made by the prime minister in January, but the decline so far has been slower than expected. To have any hope of winning the next election, Sunak and Hunt need interest rates to come down fast.

It is crunch time for the Bank, which has the job of hitting the government’s 2% inflation target and is now facing mounting criticism. So far the brickbats have tended to come from those who say the Bank was too slow to respond to price pressures and has allowed inflation to become embedded. But there are also those who say because interest rates work with a lag, the Bank risks driving Britain into a deep recession.

Wednesday is also crunch time for the UK’s housing market and the millions of people paying mortgages. The ONS says 57% of those who took out fixed rate home loans did so when rates were below 2%. Those whose deals expire in the coming months will be refinancing at three times those rates.

Good morning.

One of the most eagerly anticipated pieces of UK economic data in recent years will be released shortly.

May’s inflation report, due at 7am, will show if the cost of living crisis eased last month, and influence how high UK interest rates will be raised to slow the economy.

Economists expect the annual pace of inflation eased last month, to 8.4% in the year to May. That would be a small, but welcome, drop on April’s 8.7% inflation rate. But it would still mean a painful squeeze on household budgets.

Mortgage-holders will be desperate to see inflation fall, as borrowing costs have risen sharply in recent months. Yesterday, the average rate on a two-year fixed mortgage rose to 6.07%, Moneyfacts reporter, the highest since November.

Policymakers at the Bank of England are equally keen to see a slowdown in consumer price rises. The BoE’s target is to keep inflation at 2%, so it is forecast to raise interest rates for the 13th time in a row on Thursday, probably from 4.5% to 4.75%.

The BoE will also be looking at the latest figures for core inflation (stripping out food and energy), which is expected to stick at an annual rate of 6.8%.

The money markets have indicated UK interest rates could hit 6% by early next year.

Danni Hewson, head of financial analysis at AJ Bell, thinks 6% could be unlikely, though:

“Thursday’s rate rise looks nailed on but what is beginning to filter through to markets is uncertainty about what comes next. The chancellor might have ruled out government help for mortgage holders facing a horrifying cliff edge but there’s little doubt that what’s happening in the mortgage market is deeply destabilising to the economy.

“The UK might have skirted recession up until now but suck thousands of pounds out of the pockets of middle earners and all those retailers, hospitality businesses and other service sector companies are likely to take a hit, and the uptick in GDP the country enjoyed in April might not be forthcoming in the months ahead.

“And that will be the possibility being weighed up by members of the MPC ahead of their decision this week, but also the words they will use when discussing the outlook.

The government will also be crossing their fingers and hoping that inflation comes down soon, given Rishi Sunak’s target of halving it (to 5%) by the end of the year….

The agenda

• 7am BST: UK inflation report for May

• 9.30am BST: UK house price index for April

• 11am BST: CBI’s industrial trends survey of UK manufacturing