UK inflation highest in G7, dialling up pressure on Bank of England to raise rates again

The likelihood of the Bank of England hiking interest rates for the sixth time in a row is ramping up after new figures revealed the UK has the highest inflation in the G7.

Prices climbed 9.1 per cent annually in May, up from April’s already four decade high rate of nine per cent, according to figures published today by the Office for National Statistics (ONS). That level was in line with City economists’ expectations.

Canada and Japan are the only members of the G7 yet to report new inflation estimates, but are expected to trail far behind Britain’s rate, meaning the UK will top the inflation league table.

The rate of price rises is now more than four times the Bank’s two per cent target. Governor Andrew Bailey and co have already sent rates to a 13-year high of 1.25 per cent, but they are still low by historical standards.

Although living costs are already accelerating at the fastest pace in recent history, they are expected to keep on rising. The Bank thinks inflation will peak at just over 11 per cent in October, fuelled by the energy watchdog raising the cap on bills again. 

The Institute of Directors said nearly half of business leaders think inflation will still be above the Bank’s target in two years’ time.

“Although there will be some reassurance that the rate of increase has temporarily steadied following last month’s rise, we will have a long wait before it gets anywhere near back to the Bank of England’s two per cent target,” Kitty Ussher, chief economist at the Institute of Directors (IoD), said.

Other analysts repeated concern over the trajectory of prices. There are ​​“no signs yet of inflation receding,” Yael Selfin, chief economist at KPMG UK, said.

The retail price index, an old measure of inflation, hit 11.7 per cent. Prices for materials used by factories soared at the fastest rate since records began in 1985, meaning businesses face a tough choice of swallowing thinner margins or passing on swelling costs to consumers as demand cools.

Soaring food and energy prices pushed the overall cost of living higher, both boosted by Russia’s invasion of Ukraine gumming up flows of oil, gas and basic foodstuffs. Food prices rose 8.6 per cent over the last year, the highest rise in 13 years, while energy costs jumped an eye watering 53 per cent.

Inflation is hitting poorer households harder due to this group spending a greater proportion of their income on food and energy bills. 

Yesterday, energy research company Cornwall Insights said the cap on bills would top £3,000 next January, indicating the cost of living crunch is unlikely to ease anytime soon.

“We are using all the tools at our disposal to bring inflation down and combat rising prices,” chancellor Rishi Sunak said.

Last month, Sunak launched a £15bn cost of living support package that will cover most of the rise in living costs for the poorest.

Signs of easing price pressures?

There were signs of price pressures easing, however. Core inflation, which is arguably a more accurate measure of price rises in an economy, dipped to 5.9 per cent from 6.2 per cent.

That drop means traders should trim their expectations for the Bank to accelerate its tightening cycle by hoisting rates 50 basis points at its next meeting on 4 August, experts said.

“It is not obvious in this release that there are signs of the “more persistent inflationary pressures” that last week the Bank said would prompt it to “act forcefully”,” Paul Dales, chief UK economist at Capital Economics, said.

The UK is on the verge of tipping into a recession, primarily caused by households cutting spending in response to their budgets being squeezed.

The worsening economic outlook is “a timely reminder of the precarious situation faced by policy makers, particularly the MPC, who must try and bring inflation under control without plunging the economy into a recession,” Dr Kemar Whyte, senior economist at the National Institute of Economic and Social Research, said.

Nonetheless, rampant inflation is eroding Brits’ incomes and cancelling out pay rises, meaning living standards are falling.

Railway workers this week are staging the largest strike since the late 1980s in a bid to secure a pay rise to protect their incomes. They have reportedly been offered a seven per cent rise, which would trail the cost of living.

Health workers and teachers have threatened to join the RMT union in industrial action.

Including bonuses, pay growth outpaced inflation in the three months to May, according to the ONS. Stripping out one-off payments and focusing on regular pay, real incomes are falling at the fastest rate in over a decade.