Worse-than-expected inflation figures spark economic concerns
Downing Street insisted that the Prime Minister’s plan to halve inflation was still on track, despite the setback
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Ministers and officials have insisted increases in living costs will fall even as three consecutive drop in inflation were interrupted last month.
But economists warned that the surprise inflation pause was likely to lead to higher mortgage rates for homeowners, while one adviser to the Chancellor said a recession might be needed to get it under control.
On Wednesday Downing Street insisted that despite the setback the plan to halve inflation by the end of the year was on track.
In May Consumer Prices Index inflation (CPI) was 8.7%, compared to the 8.4% experts had forecast, the Office for National Statistics said.
Halving inflation “remains the target,” the Prime Minister’s official spokesperson said.
Asked if they are on track to fulfil the promise, they added: “Yes. Despite some of the coverage at the time (of the announcement of the pledge) this was never something that was straightforward.”
Speaking in Parliament, Prime Minister Rishi Sunak did not specifically mention the target to halve inflation, but said: “Yes, inflation is a challenge, that’s why we are on track to keep reducing it.”
Experts said that the inflation figure will heap extra financial pressure on households, and that those with mortgages are likely to face increasing interest rates as a result.
Karen Ward, a JP Morgan economist who advises the Chancellor, said that the Bank of England has to “create a recession” if it is to control inflation.
She said only this could interrupt the so-called wage-price spiral where companies put prices up, forcing workers to ask for pay rises, which means companies increase prices further to pay for those new salaries, and so on.
The Office for National Statistics (ONS) said prices of plane tickets, entrance to live music venues, and computer games had particularly hit households during the month.
Meanwhile, the price of petrol and diesel fell compared to a year ago, the ONS said.
The ONS also said that the increase in food prices slowed from 19.1% in April to 18.4% in May after hitting a 45-year high in March.
The increase in the price of milk, cheese and eggs eased the most, the ONS said, while fish was the only food item whose cost increased, largely driven by the price of canned tuna.
The news means added pressure for households. Figures from the Money Advice Trust show that since March 2022 the number of adults who are behind on one or more household bill has risen from 7.9 million to 11.6 million.
ONS chief economist Grant Fitzner said: “After last month’s fall, annual inflation was little changed in May and remains at a historically high level.
“The cost of air fares rose by more than a year ago and is at a higher level than usual for May.
“Rising prices for second-hand cars, 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 this month with costs rising more slowly than this time last year.”
The news is likely to put more pressure on interest rates too.
Decision-makers at the Bank of England are meeting on Thursday to look at rates.
The Bank is tasked with keeping inflation as close to 2% as it can, and the best tool it has to do that when inflation is high is by raising the base interest rate.
But this is likely to pile even more pressure on mortgage-holders as rates are already at close to 15-year highs.
The likelihood of the Bank hiking rates further will be exacerbated by so-called core CPI, which rose to 7.1% in May from 6.8% in April.
The figure – which excludes the price of energy, food, alcohol and tobacco – is often more in focus for the Bank’s decision-makers when they set interest rates.
Liberal Democrat Treasury spokeswoman Sarah Olney said: “These worse-than-expected figures show the Government is failing miserably to bring inflation down and provide relief for struggling families facing soaring bills.
“Home-owners now face the likelihood of even more interest rate hikes adding to their monthly mortgage payments, all while the Chancellor just sits on his hands.”
Chancellor Jeremy Hunt said the Government would “stick to its guns” and insisted patience was needed for Bank of England rate rises to curb inflation.
He told broadcasters: “Today’s figures strengthen the case for the Government to stick to its guns.
“No matter what the pressure from left, right or centre, we won’t be pushed off course.
“Because if we are going to help families, if we are going to relieve the pressure on people with mortgages, on businesses, we need to squeeze every last drop of high inflation out of the economy.”
The ONS said the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose to 7.9% in May, up from 7.8% in April.
The Retail Price Index (RPI), which is used to calculate the rise in train fares among other things, dropped from 11.4% in April to 11.3% in May.
To set inflation figures, the ONS tracks the prices of dozens of different items that households buy.
Wednesday’s CPI figures mean that a shop which cost around £100 a year ago would cost around £108.70 today.
Inflation has been falling in recent months, but a lot of that is simply due to the way that the figure is calculated.
Prices are measured against where they were a year before.
That means that while inflation rates have fallen, part of this is because today’s inflation figures are being compared against a time when costs had already risen.