UK inflation remained higher than expected for a fourth month, leading to a fresh flurry of bets on higher interest rates as consumers struggle with soaring mortgage costs.
The consumer price index rose 8.7 percent last month, the same as the month before, the Office for National Statistics said yesterday.
Core inflation, excluding food and energy, accelerated unexpectedly to 7.1 percent from 6.8 percent.
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Economists had expected a headline reading of 8.4 percent and core to remain unchanged.
The figures raise the specter of the Bank of England (BOE) opting for a bigger rate increase today in the quickest monetary tightening in four decades.
A separate report showed that government debt now exceeds the size of the UK economy for the first time since 1961, imperiling British Prime Minister Rishi Sunak’s promise to restore health to the public finances and cut inflation.
“It is looking increasingly likely that it will require a recession to finally get the inflation genie back into the bottle,” said Stuart Cole, chief macro economist at Equiti Capital in London.
Traders piled into wagers for more BOE interest-rate hikes. Money market pricing fully priced its key rate hitting 6 percent by December. Investors see about a 50 percent chance officials would opt for a larger half-point hike today.
“May’s surprise rise in core inflation will cast a large shadow over the Bank of England’s June meeting. While we still think a 50-basis-point hike is unlikely, there’s now a good chance of a minority vote for a bigger move,” Bloomberg economists Dan Hanson and Ana Andrade said. “The central bank’s messaging is also likely to be more hawkish, though we think any tweaks are likely to be fairly measured — rate expectations have surged since the BOE last met, but it’s not clear they need another nudge higher.”
The BOE has raised rates at 12 consecutive meetings from 0.1 percent to 4.5 percent, and is expected by economists to lift them by at least a quarter point to 4.75 percent today.
“It is possible that the bank will raise rates by 50 basis points tomorrow and will need to hike rates above 5.25 percent to get on top of core inflation,” said Paul Dales, chief UK economist at Capital Economics. “The acceleration in core inflation leaves the UK looking increasingly like the global outlier and the stagflation nation.”
Used vehicle 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,” Office for National Statistics chief economist Grant Fitzner said.
“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,” he added.
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