Inflation refuses to budge
Rishi Sunak’s pledge to halve inflation is being cast into doubt after an especially gloomy new set of data on price rises in Britain.
Headline inflation didn’t budge in May. It is stuck at 8.7 per cent – the same as April and the highest among the G7 major economies.
The latest ONS figures offer zero respite to those struggling with the cost of living. Following its release, the interest rate charged on two year government borrowing shot up to a new 15 year high, inflicting fresh pain on households with two year fixed mortgages.
This is the third month in a row that inflation figures have been worse than forecast. The Bank of England had estimated a fall to 8.3 per cent by now.
Most worrying of all, core inflation – which excludes food and fuel and is a key indicator of underlying inflationary pressures – unexpectedly rose last month to 7.1% – the highest in 31 years.
This challenges prior assumptions that inflation has largely been driven by the soaring cost of energy and food, stemming from global factors such as war in Ukraine. In fact, the falling prices for motor fuel were actually the largest “downward contribution” to inflation while food inflation is thought to have peaked – yet still, the inflationary beast refuses to be tamed.
Rising core inflation suggests the rapid pace of price rises is no longer being driven by essential goods, but rather, by the considerable number of Brits still willing to fork out extra for recreational activities. According to the ONS, the rising cost of airfares, computer games and live music events (Beyonce or otherwise) have all played a part.
Why aren’t spending habits slowing? Some economists say that wage rises – which reflect labour shortages – are a key factor.
While the cost of living crunch is certainly inflicting much pain on certain demographics, the fact that a large number of Britons don’t appear to be feeling the squeeze means interest rate hikes aren’t having the intended effect. The government wants people to cut back on spending as this is what brings inflation down.
Indeed, the Bank of England may now be forced to spark a recession to tame inflation – breaking another of Sunak’s five pledges to keep the economy growing.
To make matters worse for the PM, similarly glooming new figures show Britain’s national debt topped 100% of GDP for the first time in 60 years last month, during the second-highest May borrowing on record. Some say this means pre-election tax cuts no longer look feasible.
Despite the mortgage ticking time bomb, the latest inflation data means another interest rate hike is all but guaranteed when the Bank’s Monetary Policy Committee meets on Thursday. It may even consider a heftier half point rise. And money markets are now pricing in 6% interest rates by the turn of next year.
Some commentators have pointed out that we’re still talking about comparatively low figures when we remember the peaks of the 70s. But it’s not comparing like for like. As the New Statesman’s George Eaton argues, “An interest rate of 10% in the 1970s is equivalent to one of just 2% today. House prices are 65 times higher now than in 1970 while average wages are only 35 times higher.”
At a fiery PMQs session, Keir Starmer labelled rising interest rates “Tory mortgage penalty” – a slightly flawed jibe when we remember that rising interest rates are a global phenomenon. Then again, where Britain does risk becoming a global outlier is if its rate hikes fail to actually realise their aim: of bringing inflation down.
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