Interest rate rise expected after inflation shock in Great Britain

  • By Michael Race
  • Business reporter, BBC News

image source, Getty Images

Interest rates are expected to rise again after UK inflation remained at a much higher than expected level for the fourth consecutive month.

Inflation, which tracks price increases, was 8.7% in May, the same as in April.

The shock figure was driven by higher prices for flights and used cars, but food prices in supermarkets also continued to rise rapidly.

Rates are expected to rise by 0.25% to 4.75% on Thursday, but some suggest they could now rise to 5%.

Karen Ward, a member of Chancellor Jeremy Hunt’s economic advisory council, said the bank had “been too hesitant” in raising interest rates so far and urged it to “create a recession” to curb rising prices.

“It’s only when companies feel nervous about the future that they’ll think, ‘Well, maybe I don’t want to put up with that price increase,’ or workers, when they’re a little less secure in their jobs, think, ‘Oh, I don’t want to pressure my boss for the higher pay,” she told the BBC’s Today programme.

But Andrew Selley, chief executive of Bidfood UK, a wholesale food supplier, said raising rates “wasn’t the right thing to do”.

“It’s stifling the economy. They have to look at other ways to support businesses so they can weather the storm,” he said.

Hunt appeared to back further rate rises, saying it would not “hesitate in our decision to support the Bank of England as it tries to push inflation out of our economy.”

The bank is tasked with keeping inflation at 2%, but the current inflation rate is four times higher than this. It has been raising interest rates steadily since the end of 2021. This makes it more expensive to borrow money and theoretically encourages people to borrow less and spend less, which means price rises should ease.

This has led to concerns about loans, particularly mortgages, with homeowners – a third of UK adults – facing big increases in repayments when fixed-term deals come to an end. First-time buyers also risk being priced out of the market as loan terms become tighter.

The average two-year fixed-rate mortgage on Wednesday reached 6.15%, while five-year deals were at 5.79%.

In a heated exchange at PMQs, Labor leader Sir Keir Starmer said Tory policies were to blame for the “borrowing disaster”.

“He [Rishi Sunak] know very well the cause of the mortgage disaster – 13 years of financial failure and a Tory kamikaze budget that crashed the economy and put mortgages through the roof.

Prime Minister Rishi Sunak hit back, citing the “global macroeconomic situation” and saying it had spent “tens of billions” on supporting people with the cost of living.

So-called “core” inflation, which strips out volatile factors such as direct energy and food prices, along with alcohol and tobacco prices, continued to rise last month, rising at the fastest rate in 31 years.

Economists said this made the UK stand out from other countries such as the US and Germany where inflation is falling.

Grant Fitzner, chief economist at the Office for National Statistics (ONS), which produces figures on the UK economy, said the increase was driven by rising service prices in cafes, restaurants and hotels.

“That’s probably driven, at least in part, by the increase we’ve seen in wages,” he added.

Yael Selfin, chief economist at KPMG UK, also said rising core inflation suggested firms could be passing on rising costs from higher wage bills to consumers,” she said.

UK wages have risen at their fastest rate in 20 years, barring the pandemic, but still lag behind the pace of inflation.

This is a grim number. Inflation is not just stubborn or sticky. It is, on the last numbers, stuck. These numbers should be falling now, and they are in other countries such as the US and Germany.

My inbox was flooded with instant footage at 7am, ranging from “unfortunate” to “challenging” to “disaster”.

Wednesday’s figures show that the already difficult balancing act between inflation and recession is getting worse. It may take more than just the Bank of England to do the heavy lifting.

Wages that do not keep pace with price increases have meant that many households have come under financial pressure in recent months.

Food price inflation, which is the rate at which the prices of groceries have risen compared to the previous year, was 18.3% in May, slightly down from 19% in April.

Sergio Ronga, who owns Nanninella Pizzeria in Brighton, said he had to raise prices as a result of higher costs.

He said the cost of his ingredients had risen with tomatoes almost doubling in price, as well as flour rising by 60% and cheese by 50%.


Sergio Ronga has seen his costs rise sharply

Sarah Coles, head of personal finance at Hargreaves Lansdown, said that although food price inflation had eased, it was still at a level that was “causing pain at the coffers”.

“Costs have risen so far and so fast that we’re not going to see prices fall back to the level we’re used to. In fact, in many cases, we won’t see them fall at all: they’ll just get more expensive at a slower rate ,” she said.

Separately, figures released on Wednesday revealed that national debt was greater than Britain’s economic output for the first time since 1961.

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