UK inflation remained higher than expected for a fourth month, ratcheting up pressure on the Bank of England to hike interest rates more aggressively.
The Consumer Prices Index rose 8.7% from a year ago in May, the same as the month before, the Office for National Statistics said Wednesday. Core inflation, which excludes volatile food and energy, accelerated unexpectedly to 7.1% from 6.8%. Economists had expected a headline reading of 8.4% and core to remain unchanged.
The pound rose after the release, rising as much as 0.3% to $1.2802.
Used car prices along with airline tickets and the cost of recreation and culture drove the increase, suggesting that price pressures have moved beyond food and energy into the rest of the economy.
“The cost of airfares rose by more than a year ago and is at a higher level than usual for May,” said Grant Fitzner, ONS chief economist. “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.”
Britain remains an outlier among major economies with prices rising more than four times faster than the central bank’s 2% target. BOE Governor Andrew Bailey is concerned about signs inflation is remaining more persistant despite the quickest round of rate hikes in four decades.
While the BOE expects inflation to ease sharply this year, economists warn that Prime Minister Rishi Sunak may struggle to meet his goal of cutting it in half.
“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,” Chancellor of the Exchequer Jeremy Hunt said in a statement. “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.”
Two price measures being closely watched by the BOE for signs of domestically generated inflation picked up again. Core inflation - which excludes volatile food and energy prices — unexpectedly accelerated to a fresh 30-year high of 7.1% while services prices increased by 7.4%, up sharply from a rise of 6.9% in April.
The BOE has raised rates at 12 consecutive meetings from 0.1% to 4.5% and is expected to lift them by another quarter point to 4.75% on Thursday. Markets have fully priced in further hikes to 5.75% by early next year, a level that economists say will plunge the UK into recession.
Investors ramped up expectations that the key rate would rise to as much as 6% early next year after a string of hotter-than-expected wage and price data.
The latest inflation figures come just a day before the BOE’s latest policy decision, with economists and investors expecting another quarter-point increase in its key lending rate to 4.75%.
Those expectations sent mortgage rates soaring above 6%, well into the territory that BOE officials have identified as a serious strain on households. Chancellor of the Exchequer Jeremy Hunt is set to talk to lenders about how they can soften the blow.
Inflation is falling more slowly in the UK partly because falling commodity prices are passed on to regulated domestic energy bills with a lag. Also, Britain had more than 500,000 people drop out of the jobs market during the pandemic, forcing companies to bid up wages to secure the staff they need.
Bailey said last week that inflation will come down but that it is taking a “a lot longer than expected.” He warned of a “very tight” jobs market, highlighting that many firms are hoarding workers given the difficulties to recruit.
Slower inflation is crucial to the political fortunes of Sunak, who made halving price growth by the end of the year one of his five key pledges.
--With assistance from Andrew Atkinson and Elina Ganatra.
(Updates with details from report and market reaction.)