Despite expectations that inflation would fall, the Office for National Statistics announced on Wednesday that consumer price inflation in the UK remained at an annual rate of 8.7% in May. Having seen a reduction in the US and other European nations in recent weeks, the UK bucked the trend and continues to see the fastest rate of price rises across the G7. The big surprise came from core inflation (which excludes the price of energy and food), which actually increased to 7.1% in May, from 6.8% in April.
Food price inflation fell slightly but remains painfully high at 18.4% in May. Given that the UK imports more than 50% of its food, the recent strength of sterling should hopefully help drive this down further in the months ahead. Tesco’s boss, Kevin Murphy, noted in their trading statement last week that they were cutting prices on many everyday essentials and pointed to “encouraging early signs that inflation is starting to ease across the market.”
It was already widely expected that the Bank of England would increase interest rates but following the surprise inflation data, the only question was: by how much? With a vote of 7 to 2, the committee decided to raise interest rates by 0.5% to 5%, bringing the lending rate to its highest level since April 2008. In explaining why the committee opted to increase the cost of borrowing, Governor Andrew Bailey said, “If we don’t raise rates now, high inflation could stick with us for longer” and promised to do “whatever is necessary” to bring inflation toward their 2% target.
The chancellor, Jeremy Hunt, is backing the BoE and made it clear that he understood the need for higher interest rates. He also ruled out support for those millions facing soaring mortgage costs when their fixed rate deals expire, saying that the Government will “stick to its guns.”
Although the increase in interest rates will impose hardships on borrowers, it is deemed necessary to try to regain price stability and foster long-term economic health. By proactively addressing inflation, the BoE (and central banks in general) aim to create an environment of economic stability that benefits society as a whole, even if it entails plenty of initial pain.
John Naylor, Chartered FCSI – Head of Investment Committee