Die Bank of England mit der Wellington-Statue in London.
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In Germany, inflation is slowly receding. The example of Great Britain shows that the normalization of prices is a sure-fire success.
The inflation rate there remained at a high 8.7 percent in May. Even the expected small decline did not materialize. Core inflation excluding energy and food picked up even more.
The Bank of England will continue to hike interest rates in the UK.
Inflation has peaked and is now declining steadily. That is the mantra of many economists and politicians. This is also the case in Germany, the USA and large parts of Europe. However, the UK example shows that a drop in inflation cannot be taken for granted – and that price stability may still be a long way off.
Surprisingly, the inflation rate there did not decrease in May. Consumer prices rose a strong 8.7 percent year-on-year, as in April, it said Statistics office ONS on Wednesday with Economists had expected at least a decline to 8.4 percent. The cost of living rose by 0.7 percent month-on-month. This is also more than expected.
Core inflation, excluding volatile prices for energy, food and beverages, rose surprisingly from 6.8 to 7.1 percent. The rate for May is the highest since March 1992. Many central banks, including the British central bank, are currently paying particular attention to this value.
In Great Britain, inflation is not only particularly stubborn, it is also particularly high. In the euro zone and also in Germany, inflation fell to 6.1 percent in May. At 4.0 percent, the inflation rate in the USA is again lower than before the start of the Ukraine war.
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Persistent inflation on the island is now putting the British central bank under pressure. The Bank of England is likely to raise interest rates again this Thursday. An interest rate step of 0.25 percentage points had previously been expected. A larger step of 0.50 points is now considered possible.
Bank of England ahead of next interest rate hike
The key interest rates in Great Britain are already at their highest level since the 2008 financial crisis. Since the end of 2021, the central bank has raised the bank rate from almost zero to 4.5 percent. It’s one of the sharpest tightenings the UK economy has ever endured.
The pound initially reacted to the inflation figures with exchange rate gains against the euro and the dollar. However, the British currency came under pressure as trading progressed. Fears of stagflation were cited as the reason on the market, i.e. the fear of a stagnating economy coupled with high inflation.
The British economy is already feeling the headwind of the sharp hikes in interest rates. A major issue is the sharp rise in mortgage interest rates, which are making home construction financing significantly more expensive.
The UK national debt has also increased. At the end of May, a debt ratio of more than 100 percent of economic output (GDP) was marked for the first time in 62 years, as the statistics office announced. In absolute terms, according to the ONS, the debt level was almost 2.6 trillion pounds (around 3 trillion euros).
The development is putting Prime Minister Rishi Sunak’s government under pressure from two sides: Sunak has not only promised to do something about the sharp rise in the cost of living. The prime minister also wants to put public finances in order.
DPA/ro
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