Inflation overshoots expectations ahead of Bank of England meeting
Inflation hit 3.4 per cent in the year to May, official data has revealed, which is set to be the final set of data Bank of England officials receive before coming to an interest rates decision on Thursday.
Data published by the Office for National Statistics showed services price growth, which is closely monitored by rate-setters, slowed to 4.7 per cent compared to 5.4 per cent in April.
A Bloomberg poll of economists said inflation would hit 3.3 per cent in the 12 months to May, although City analysts largely differed with Goldman Sachs predicting inflation to be higher than economists at Pantheon Macroeconomics.
The ONS said prices of chocolates and meat products rose higher while the cost of furniture and household goods also pushed up the rate of inflation.
“A variety of counteracting price movements meant inflation was little changed in May,” said Richard Heys, chief economist at the ONS.
“Air fares fell this month, compared with a large rise at the same time last year, as the timing of Easter and school holidays affected pricing. Meanwhile, moto fuel costs also saw a drop.”
Chancellor Reeves said the government had taken the “necessary choices” to get inflation “under control” compared to a spike in late 2022 under Liz Truss’ watch, though the recent jump above three per cent has partly been caused by employment tax hikes.
“We know there’s more to do,” Reeves added.
“Last week we extended the £3 bus fare cap, funded free school meals for over half a million more children, and are delivering our plans for free breakfast clubs for every child in the country. This government is investing in Britain’s renewal to make working people better off.”
Economists are sure to be interrogating data more closely this month after last month’s inflation figure was revised down to 3.4 per cent due to an error in tax calculations — an unprecedented move that has undermined businesses’ confidence in the national statistics body.
The ONS has kept its recorded April inflation data at 3.5 per cent in order to follow procedures it has set for itself.
The Bank of England’s Monetary Policy Committee (MPC) may include a reference to the ONS’ handling of key data in minutes to its monetary policy decision, which is set to be released to the public at 12pm on Thursday.
Rate-setters are widely expected to hold interest rates at 4.25 per cent due to caution over high wage growth.
Inflation worries fail to subside
Inflation is also set to remain above three per cent for the rest of the year due to the “inflationary effects from higher government spending”, National Institute for Economic and Social Research (NIESR) economist Monica George Michail said.
“The current tensions in the Middle East are causing greater economic uncertainty,” she said.
“We therefore expect the Bank of England to keep rates on hold this Thursday and implement just one further cut this year.”
Capital Economics’ Ruth Gregory said a rise in the food price inflation to its highest level since early February would worry rate-setters.
“[It] will be a bit of a blow for the Bank as it perhaps provides a tentative sign that firms are passing on more of April’s rise in national insurance contributions in their selling prices.”
British Retail Consortium insight director Kris Hamer said a climb in food price inflation came off the back of warnings that high street shops could not fully absorb extra labour costs imposed by Reeves.
“Ensuring no shop pays more under business rates reform would be a meaningful step forward, offering much needed relief to an industry that continues to see prices, job losses and store closures all rising,” Hamer said.
Bank officials will also be wary of consumers and firms’ high inflation expectations for the year amid a lack of confidence about the UK economy.
But dovish rate-setters Alan Taylor and Swati Dhingra have argued for more interest rate cuts to be made as President Trump’s aggressive trade policy is expected to leave the world economy hamstrung.
Dhingra has argued that tariffs will have a deflationary effect on prices as cheaper goods are more likely to flood into the UK.
While Trump has reduced tariffs on some of the US’ largest trading partners, including China, global economists at the World Bank and IMF expect friction to grind GDP growth.
The next meeting is likely to reveal the Bank’s view on the effects of global trade on UK inflation, though some economists are wary that firms may hike prices to deflect worries.