According to data released by the Office for National Statistics on May 24, the UK consumer price index (CPI) in April was still higher than market expectations, and core inflation rose to a 30-year high. This has increased the pressure on the Bank of England to continue raising interest rates. At the same time, the characteristics of stagflation in the British economy further emerged.
Core inflation rises to 30-year high
The latest data show that the UK consumer price index (CPI) rose by 8.7% year-on-year in April, higher than market expectations of 8.2%, and still far above the Bank of England’s target level of around 2%.
Among them, the UK’s core inflation rate excluding energy and food unexpectedly jumped to 6.8% year-on-year, compared with economists’ consensus forecast of 6.2%. In addition, the CPI of the service industry rose by 6.9% year-on-year, higher than the previous value of 6.6% and the Bank of England’s previous forecast of 6.7%. Both indicators hit their highest levels since March 1992.
Grant Fitzner, chief economist at the ONS, said that with April not repeating last year’s sharp rise in energy prices, UK inflation was notably lower than in previous months, but the annual increase in food prices remained close to record highest value.
Prices of food and non-alcoholic beverages in the UK continued to rise in April, up 19.1% year-on-year, leading to high overall inflation. According to the data released by the British National Bureau of Statistics, the CPI in the UK rose by 10.1% year-on-year in March, and the CPI rose by 10.4% year-on-year in February.
At the same time, prices in the UK rental market are also rising. According to the data from the Office of National Statistics of the United Kingdom, the UK rent price index rose by 4.8% year-on-year in April, and the London rent price index rose by 5% year-on-year, the largest single-month increase since November 2012.
Some agencies pointed out that the duration of inflation in the UK will exceed the expectations of the Bank of England. The National Institute of Economic and Social Research, a British think tank, predicted in a report released a few days ago that by the end of this year, British inflation will only drop to about 5.4%, and it is expected that British inflation will return to 1.3% to 1.4% by the third quarter of 2025. about.
The Bank of England expects U.K. inflation to fall sharply in 2023, but is concerned that price pressures will persist even after sharp falls in energy prices. Grocery prices are keeping inflation high, the economy is more resilient than expected and the labor market remains extremely tight, adding to wage pressures.
British Prime Minister Rishi Sunak promised at the beginning of the year to halve the inflation rate this year. But inflation has been stickier than the Bank of England expected, with inflation unexpectedly rising in the past two months.
British Chancellor of the Exchequer Jeremy Hunt said food prices were still rising too fast despite aggressive anti-inflation efforts that had brought inflation down to single digits. Therefore, in addition to continuing to provide about 3,000 pounds of living support for families this year, it is also necessary to resolutely implement the plan to reduce inflation.
Bank of England may continue to raise interest rates
According to Agence France-Presse, judging from market expectations, the UK’s April inflation rate remains high. ING economist James Smith said that UK inflation in April was higher than almost everyone expected, including the Bank of England, which undoubtedly increased the possibility of another interest rate hike in June.
Since April last year, the inflation situation in the UK has been deteriorating. In October last year, the CPI rose by 11.1% year-on-year, hitting a new high in 40 years, and then began to fall slightly. In order to control inflation, the Bank of England has raised interest rates 12 times in a row since December 2021, bringing the benchmark interest rate to 4.5%.
While inflation fell to single digits for the first time in months, pressure continued to mount on the Bank of England to extend its rate hike cycle through the summer. “Given that inflation is more stubborn than the BoE expects, it is now almost certain that the BoE will raise interest rates from 4.50% to 4.75% in June, and then possibly further hikes in the next few months.” Capital Economics Chief UK Economist Paul Dales said.
Credit Suisse raised its forecast for U.K. interest rates after unexpectedly strong inflation data, predicting the Bank of England will raise its benchmark rate to 5 percent this year. “The Bank of England is expected to raise interest rates twice (in June and August) by 25 basis points each,” Sonali Puhani, chief UK economist at Credit Suisse, wrote in a note to clients on the 24th.
Jerry Barterstone-Carr, European strategist at Raymond James Investment Services, said the core CPI data, especially the rise in services sector CPI, dealt a heavy blow to the embattled Bank of England. “It’s probably far from peak rate hikes at this point.”
Bank of England Governor Bailey warned that UK inflation is sticky and will take longer to come down after data that beat expectations spurred markets to increase bets on rate hikes. Bailey denied that the UK was suffering from a wage-price spiral, but acknowledged that the BoE was grappling with stubborn upward pressure on core prices and a “very tight labor market”.
The state of economic stagflation is further revealed
Recently released economic indicators show that the British economy slowed down in May. The international rating agency Standard & Poor’s released data on the 23rd showing that the shrinkage of the British manufacturing industry has further intensified. The manufacturing PMI fell to 46.9 in May from 47.8 in April. The British service industry, which had been rising steadily in the first few months of this year, also turned to decline in May, and the service PMI fell to 55.1 from 55.9 in April. Overall, the UK’s composite purchasing managers’ index, which includes manufacturing and services, fell to 53.9 in May from 54.9 in April.
Analysts pointed out that the British economy will face more serious adverse effects in the summer. Although the price of energy, including gas, is falling, the positive impact of lower energy prices will be offset by higher mortgage rates and an upcoming increase in personal income tax rates. Suren Thiru, head of economics at the Institute of Chartered Accountants in England and Wales, pointed out that tax increases will squeeze residents’ consumption spending and enterprises’ willingness to invest. Coupled with the lagged impact of rising interest rates, the growth prospects of the British economy may be weaker than those of the Bank of England. current expectations.
The latest quarterly economic outlook report released by the National Economic and Social Research Institute of the UK believes that the UK economy will continue to maintain low growth and high inflation for some time to come, and the poorest families urgently need government assistance. Some institutions pointed out that although the British economy will not shrink this year, its growth may not be as expected by the Bank of England. The characteristics of stagflation will be more obvious, and the duration of stagflation may exceed expectations.
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