Official figures released on Wednesday revealed that British consumer price inflation exceeded expectations, remaining at a high level of 8.7% in May. This news comes a day before the Bank of England’s anticipated 13th consecutive interest rate increase. Economists had predicted a slight decrease in the annual CPI rate to 8.4% for May, distancing itself from the 41-year high of 11.1% recorded in October.
This article explores the implications of persistent inflation, discusses the unexpected rise in core inflation, highlights contributing factors to the high inflation rate, and considers the impact on the British economy and policymakers.
Contrary to economists’ projections, British consumer price inflation did not ease as anticipated, maintaining a high rate of 8.7% in May. This rate surpassed inflation levels observed in other major advanced economies, making the UK the highest among G7 countries. Italy, the closest contender, recorded a rate of 8.0% in May. The unexpected persistence of inflation presents a significant challenge for policymakers and poses a particular concern for Prime Minister Rishi Sunak, who has pledged to halve the pace of price growth by the end of 2023 ahead of the projected 2024 national election.
The Office for National Statistics (ONS) reported an unexpected increase in core inflation, which excludes volatile prices of food, energy, alcohol, and tobacco. The core inflation rate rose from 6.8% to 7.1% in May, marking its highest level since 1992. The Bank of England considers core inflation an essential indicator of underlying price pressures. The unexpected rise suggests that the economy continues to experience inflationary pressures across various sectors.
Several factors have contributed to the persistently high inflation rate. The cost of airfares, notably higher than last year, reached an unusual level for May. Additionally, rising prices for second-hand cars, live music events, and computer games have further fueled inflation. These factors, along with other economic considerations, have resulted in British inflation remaining stubbornly high, outpacing expectations.
The Bank of England is widely expected to announce another interest rate hike on Thursday, which would mark the 13th consecutive increase. The interest rate is forecasted to rise from 4.5% to 4.75% in an effort to curb inflationary pressures. Before the release of the inflation data, market expectations for the peak in Bank of England rates had risen as high as 6% by early 2024. The interest rate hike is part of the bank’s strategy to address inflation and maintain price stability in the economy.
The persistently high inflation rate poses challenges for the British economy. High inflation erodes purchasing power and places a burden on consumers, particularly impacting those with fixed incomes. It also adds uncertainty to business operations and investment decisions. In response, policymakers, including the Bank of England and the finance minister Jeremy Hunt, are committed to tackling inflation. The finance minister pledged to support the Bank of England’s efforts to combat inflation while offering targeted assistance to alleviate the cost of living.
Despite expectations that British consumer price inflation would ease, it remained at a high level of 8.7% in May, surpassing projections. Core inflation unexpectedly rose to its highest level since 1992, indicating persistent underlying price pressures. Contributing factors such as airfare costs, second-hand car prices, live music events, and computer game prices have contributed to the high inflation rate.
