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Inflation in the UK remained stubbornly high in May at 8.7 percent – the same rate as the previous month – putting pressure on the Bank of England (BoE) and the UK government to take action.
On Thursday, the BoE is expected to raise interest rates for the 13th consecutive time – a monetary measure governments use to control inflation.
Meanwhile, inflation in the United States was 4 percent in May. Japan saw an inflation rate of 3.4 percent, while Germany registered an inflation rate of 6.3 percent and France’s inflation rate was 6 percent.
Why is inflation so high?
Previous forecasts from the BoE had predicted inflation in the UK to ease, falling to just over 5% in the last quarter of 2023 and falling below the 2% target in early 2025.
But large price increases across the economy, energy subsidies and the struggling post-pandemic UK labor market have led to skyrocketing inflation rates.
UK inflation also accelerated sharply following the full-scale Russian invasion of Ukraine in February 2022, which sent natural gas prices skyrocketing across Europe.
The Office for National Statistics said core inflation — a measure that excludes volatile food, energy, alcohol and tobacco prices, and which the BoE considers a good guide to underlying price pressures — rose unexpectedly from 6.8 percent to 7.1 percent, the highest since March. 1992.
Another measure of underlying pressures – services inflation, which is heavily influenced by rapidly rising wages and the tight post-pandemic UK labor market – also reached its highest level since 1992 at 7.4 percent.
“The cost of airfare has increased more than a year ago and is at a higher level than usual in May,” said chief economist Grant Fitzner of the Office for National Statistics.
“Rising prices for used cars, live music events and computer games also contributed to keeping inflation high.”
But food and beverage price inflation fell slightly to 18.3 percent from 19 percent in April.
Meanwhile, producer price inflation also slowed much more than economists had expected, with prices charged by manufacturers rising 2.9 percent in the 12 months to May, up from 5.2 percent in April.
What is the British government doing about it?
Tackling inflation was British Prime Minister Rishi Sunak’s priority ahead of next year’s general election.
“I work day in and day out to give families the support they need as I work to halve inflation, reduce debt and grow the economy,” he said on Twitter, a day before the May inflation figures were released.
I work day in and day out to give families the support they need while I work to halve inflation, reduce debt and grow the economy 👇 pic.twitter.com/cqg4EmnEcN
— Rishi Sunak (@RishiSunak) June 19, 2023
His administration is also likely to raise mortgage costs for millions of homeowners, with Treasury Secretary Jeremy Hunt also ruling out financial support for mortgage holders.
“Today’s numbers reinforce the case for the government to stick to its guns,” Hunt told reporters in the UK.
“If you look at what’s happening in other countries, you can see interest rate hikes drive inflation down over time, that’s going to happen here,” he added.
Markets see a 40 percent chance that the BoE will raise interest rates by half a percentage point to 5 percent, rather than the previously expected quarter-point step, in an effort to contain inflation.
Paul Dales, chief UK economist at Capital Economics, told the Reuters news agency he now predicts the BoE will raise interest rates by half a percentage point on Thursday following its latest data.
“The problem is that the recent surge in core inflation and the renewed acceleration in wage growth show that domestic inflationary pressures are still mounting,” Dales said.
“This suggests that the Bank has more work to do than the Fed or the ECB [European Central Bank].”
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