May’s inflation figures for the UK have rolled in, and the picture isn’t pretty. Rising at an annual pace of 8.7%, consumer prices stubbornly resist attempts to cool down, leaving the government and the Bank of England (BoE) under a thick cloud of pressure.
Despite the predictions of economic experts who had forecast a lesser surge of 8.4%, the inflation engine continues to roar on, unencumbered.
A relentless rise: Core inflation hitting historic highs
Data pouring in from the Office for National Statistics (ONS) paints a troubling scenario. Core inflation, a measure that strips out the unpredictable elements like energy, food, alcohol, and tobacco prices, has swelled to an annual rate of 7.1%.
This increase from April’s 6.8% is the highest seen since March 1992. Evidently, second-hand cars, recreational, and cultural goods and services, as well as air travel are the main drivers of this surge.
The Consumer Prices Index, which also considers the housing costs borne by owner occupiers (CPIH), has inched up to 7.9% from 7.8% in the year leading up to May 2023.
Despite experiencing a dip in April, when it fell below 10%, inflation still overshadows the consensus forecasts and the BoE’s 2% target by a significant margin.
A rate hike could be in the offing, as the BoE braces itself to announce the next monetary policy decision. Observers are expecting the central bank to continue the streak with its 13th consecutive interest rate rise, aiming to reel in inflation without instigating a recession or mortgage crisis.
The stickiness of inflation, compounded by a tightening labor market, has led economic thinkers to reassess their projections. They now expect a more prolonged cycle of monetary policy tightening, as well as a higher peak for interest rates.
With the Organization for Economic Cooperation and Development (OECD) suggesting that the UK will witness annual headline inflation of 6.9% this year – the highest among all advanced economies – the ongoing cost-of-living crisis poses a tough challenge to Prime Minister Rishi Sunak and his government.
The hard blow: Consumers, government, and investors at the receiving end
For the consumers, the government, and investors, these statistics are a harsh reality check. Marcus Brookes, the Chief Investment Officer at Quilter Investors, elucidated how the UK is grappling with a unique set of circumstances.
According to Brookes, these factors are leaving the BoE with fewer options, even though the consensus suggests that supply issues, rather than demand, are inflating prices.
With interest rates beginning to impact households and a possible mortgage shock in the offing, signs of strain are appearing in the UK’s economy. Brookes asserts that further rate hikes could add to the growing fear of a mortgage crisis.
Suren Thiru, the Economics Director at ICAEW, underlined how the May figures indicate that the battle against inflation is far from over, especially with soaring food bills and core inflation on the rise.
The food and non-alcoholic beverages CPIH stood at 18.4% year on year in May, underscoring the escalating pressure on UK households.
For now, the path for UK’s inflation over the summer seems set in stone, with lower gas and electricity bills from July expected to bring down the headline rate.
But while core inflation poses a challenge, the strain on consumer spending from rising mortgage costs and higher taxes may soon put it on a downward path.
