Yahoo Finance Inflation stuck at 8.7% as cost of living squeeze continues
Airfares and second-hand cars keep inflation high
The rate of price rises has remained at 8.7% in May despite expectations of a fall, according to official figures.
The Office for National Statistics said annual inflation as measured by the consumer prices index held steady from the same level in April, reversing two months of gains as the soaring cost of living adds to pressure on households. City economists had forecast a figure of 8.4%.
The lack of movement could mean the Bank of England will hike interest rates to levels that haven’t been seen this century in its attempt to bring about an end to the cost of living crisis.
NEW
Another inflation shocker.
UK CPI inflation stays at 8.7% in May.
Economists had expected it to fall to 8.4%
Core inflation (stripping out volatile stuff) RISES to 7.1% - expectations were 6.8%
Not good.— Ed Conway (@EdConwaySky) June 21, 2023
Concerningly, there was a rise in “core inflation”, which excludes food and energy prices in order to create a less volatile picture of domestic price rises. This rate, closely watched by the Bank of England, rose to 7.1%, after April’s figure was already a 30-year high.
Read more: More pain to hit homeowners as Bank of England set to rise interest rates
ONS chief economist Grant Fitzner said: “After last month’s fall, annual inflation was little changed in May and remains at a historically high level.
“The cost of airfares rose by more than a year ago and is at a higher level than usual for May. Rising prices for second-hand cars, live music events and computer games also contributed to inflation remaining high.
“These were offset by a fall in the cost of petrol. Food price inflation remains high, but the rate has eased slightly this month with costs rising more slowly than this time last year.”
On a monthly basis, consumer prices rose by 0.7% in May alone, keeping the annual rate at 8.7%.
George Lagarias, chief economist at Mazars said: “There’s no way to sugar-coat this, 8.7% is a bad number. Inflation has become entrenched and remains high versus other developed market economies.”
The inflation report figures show that motor fuel prices fell by 13.1% in the year to May 2023, compared with a fall of 8.9% in April. These falling prices for motor fuel led to the largest downward contribution to monthly inflation in May.
Goods inflation is also running at 9.7%. Food inflation dropped to 18.3% from 19%.
Helen Dickinson, chief executive of the British Retail Consortium, said: “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."
Read more: Banks raise mortgage rates to 6% anticipating interest rate rise
Chancellor Jeremy Hunt said: “We know how much high inflation hurts families and businesses across the country, and our plan to halve the rate this year is the best way we can keep costs and interest rates down.
“We will not hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy, while also providing targeted support with the cost of living."
Financial markets are braced for Threadneedle Street to raise its key base rate on Thursday from the current level of 4.5% in response to stubbornly high inflation.
“Today’s data will likely leave the Bank of England with no choice but to opt for another increase in the base rate tomorrow,” Yael Selfin, chief economist at KPMG UK, said.
This is the huge problem for the Bank of England (and the rest of us)... 👇
Core #inflation (excl. food and energy) is no longer just 'sticky' - it's actually heading in the wrong direction pic.twitter.com/dGDsf3gRO0— Julian Jessop (@julianHjessop) June 21, 2023
Giles Coghlan, chief market analyst, consulting for HYCM, said: "With today's headline inflation reading remaining sticky at 8.7%, core inflation is also proving a more difficult fire to fight, showing that more pain is likely to come from higher UK rates. Currently, core inflation reads as one of the worst in the G20 – and at 7.1% year-on-year, further interest rate hikes from the Bank of England are inevitable.
"While the BoE is unlikely to affirm this picture, interest rate markets project five more 25bps hikes still to come from the BoE, making for a terminal rate of 5.75%. A 25bps rate hike is widely anticipated by the markets this Thursday, and the GBP is likely to see a buy the rumour, sell the fact response."
Watch: How does inflation affect interest rates?
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