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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England must ‘create recession’ to fight high inflation, Hunt advisor says, as mortgage rates rise again – as it happened

Inflation United Kingdom ​​Rishi Sunak Jeremy Hunt Larry Elliott Interest Rates MPC Bank of England The Bank of England
Supermarket staff at work in London, Britain.
Supermarket staff at work in London, Britain. Photograph: Andy Rain/EPA

Afternoon summary

Time to recap, after a day dominated by depressingly high UK inflation.

The Bank of England might need to spark a recession to finally get price rises under control, an economist who advises Chancellor Jeremy Hunt has warned, as inflation remained persistently high in May.

Karen Ward, chief market strategist EMEA at JP Morgan Asset Management, told Radio 4’s Today Programme that the BoE must fight against a wage-price spiral taking hold in the UK.

Ward said:

“The difficulty for the Bank of England – I mean, no-one envies them their job at the moment – is they have to therefore create a recession,” she said.

“They have to create uncertainty and frailty, because it’s only when companies feel nervous about the future that they will think ‘Well, maybe I won’t put through that price rise’, or workers, when they’re a little bit less confident about their job, think ‘Oh, I won’t push my boss for that higher pay’.

“It’s that weakness in activity which eventually gets rid of inflation.”

Ward was speaking after inflation in the UK unexpectedly remained stuck at 8.7% in May, adding to the pressure on households suffering a surge in mortgage costs.

The Office for National Statistics reported that good inflation slowed, but services inflation accelerated at a faster pace in May.

Core inflation, closely watched by the BoE jumped to a 31-year high.

The money markets are now predicting that UK interest rates will have hit 6% by around the end of 2023.

The Bank sets UK interest rates tomorrow – a hike is nailed-on, with some economists suggesting it could lift borrowing costs by half-a-percent, to 5%. The majority expect a smaller, quarter-point, increase to 4.75%.

Mortgage holders are being hit by higher rates – Moneyfacts reported that the average two-year fixed-term mortgage now costs 6.15%, up from 6.07% on Tuesday.

More than 1 million households across Britain are expected to lose at least 20% of their disposable incomes thanks to the surge in mortgage costs expected before the next election, the Institute for Fiscal Studies has warned.

Tenants are also suffering, with rents rising at the fastest pace for 7 years.

And the boss of Berkeley Group has said the property market will remain “choppy” until interest rates settle, as the housebuilder forecast a 20% drop in sales this year.

In other news….

UK government debt has surpassed GDP for first time in 62 years

Some of the UK’s best known retailers including WH Smith, Marks & Spencer, Argos and LloydsPharmacy are among more than 200 companies collectively fined £7m for failing to pay the legal minimum wage.

The TransPennine Express train service has got “worse rather than better” since transferring to the state-owned operator of last resort (OLR), according to the rail minister, Huw Merriman.

Matt Moulding, the founder and chief executive of the online retail platform THG, has finally given up his “golden” share allowing him to block any attempt to takeover the company.

Our Politics Liveblog are covering the Westminster reaction to today’s inflationo report, here:

With UK inflation so sticky, Rishi Sunak’s pledge to halve the UK’s rate of inflation is looking trickier than when he made it.

My colleague Phillip Inman explains:

May’s data shows that most of the price rises are in areas of discretionary spending, like holidays, recreation and entertainment.

Britons have always demanded foreign holidays. And after three years of uncertainty and long periods of restrictions on travel, the sale of flights has rocketed. No one seems to mind that the airlines are hoping to recover some of their pandemic losses with much higher ticket prices.

Sunak could still score a victory. He has six months to go. Some of the biggest increases in energy and food prices happened last summer and these will not be repeated over the coming few months, which should mean inflation drops to 5% quite quickly.

Still, he thought it was going to be his easiest win and now it looks like being a Johnsonian gamble. He seems to have misread the UK economy, or at least the capacity of businesses to keep increasing prices without much justification. In that, he is not alone.

Our Money editor, Hilary Osborne, has examined why the UK property market is so reliant on short-term fixed mortgages, not the long-dates type popular in other countries.

She explains:

As well as borrowers’ desire for the cheapest deal possible, one industry source suggests that brokers have a role in keeping the market short-termist as they receive fees when a new deal is taken out, and have no incentive to tie in their customers for the long haul.

Concern about keeping options open also seems to be a factor. Although many mortgage lenders now allow overpayments and for customers to “port” their loan if they move home, borrowers think short term equals flexibility.

Neal Hudson, a UK housing market analyst at the consultancy BuiltPlace, said people might have been put off paying more for a longer-term deal because of expectations that prices would continue to rise and rates would continue to go down. He said: “The general experience over the past 40 years has been that – there may have been some short-term pain but in the medium term people have always ended up all right.

“The market has clearly bottomed out now, so will we see a change? Maybe a long-term fix does become more appealing.”

More here:

Housing analyst Neal Hudson has crunched the numbers on how house prices could fall as mortgage rates rise higher:

NatWest is raising the interest rates on some mortgage tomorrow, as lenders continue to ratchet up borrowing costs.

NatWest has told brokers it is lifting the rate on selected two-and five year fixed-rate deals by 30 basis points (or 0.3 of a percentage point).

This will cover home purchase mortgages, remortgaging products, and those aimed at first-time buyers.

This follows today’s market reaction to May’s inflation report, with UK interest rates expected to hit 6% at the turn of the year.

Q&A: Why is inflation still high and what does it mean for me?

PA Media have written a handy explainer about the UK’s inflation problem:

Q: What is inflation?

Inflation is the term used for the rate at which prices increase over time.

If the price of something rises from £10 to £11 over a year, then that would represent annual inflation of 10%.

Every month, the ONS reports the annual increases on a raft of items and services, including everything from computer games to a loaf bread.

Q: Why is it currently so high?

In May inflation struck 8.7%, as it continues to slow from the 11.1% peak it hit late last year.

Prices rocketed last year after the Russian invasion of Ukraine in late February 2022 caused the price of energy to shoot higher, adding to pressure from supply disruption.

It contributed to higher costs for firms making products or offering services, while labour costs also started to rise.

Since then, higher food and drink prices are a key reason why inflation has failed to fall as fast as hoped.

Olive oil, eggs and cheese are among items to see the sharpest increases over the past year.

Q: Why has there been a negative response to flat inflation for last month?

Firstly, it is important to highlight that flat inflation does not mean that prices have stayed the same. It means that the rate of price increases is the same as it was in the previous month.

In April, the rate of inflation dropped to 8.7% from 10.1% in March. Economists and politicians had hoped that this rate would continue to drop, with expectations it would fall to 8.4% for last month.

Inflation flatlining at 8.7% for May could indicate that it will take longer than hoped for inflation to drop to more normal levels, keeping pressure on household budgets.

Q: What does it mean for interest rates?

The Bank of England has a target to try to get the rate of inflation to around 2%.

In order to drag inflation down quickly, the most commonly used policy tool used by the central bank is increasing the base interest rate.

Increases to interest rates – which currently sit at a 14-year high of 4.5% – are designed to reduce demand from people to borrow money, because of the higher charges they will face, and encourage people to save their cash.

It is hoped that lower spending and increased saving will encourage firms to reduce prices to keep customers purchasing products or services, helping to reduce the rate of inflation.

How will this affect my mortgage?

Some variable rate mortgage deals directly track the Bank of England base interest rate and they automatically increase in line with the base rate.

Borrowers can also end up on a standard variable rate (SVR) when their initial mortgage deal ends. The SVR is set by lenders individually but it can often roughly follow movements in the base rate.

The bulk of mortgaged UK homeowners tend to take out fixed-rate deals.

Swap rates underpin the pricing of fixed-rate mortgages and these have been rising amid expectations around inflation, as it has turned out to be more “sticky” than some had expected.

Fixed-rate mortgage rates have been on an upwards march in recent days, with the average two-year fixed-rate residential mortgage now sitting at around 6%.

Q: When will we see respite from the cost-of-living crisis?

Despite the latest setback, inflation is still widely expected to continue to fall.

Last month, the Bank of England predicted that inflation would fall to 5.1% in the fourth quarter of 2023.

Q: What does it mean for the Government’s pledge to halve inflation?

The Government pledged to halve inflation annually from a rate of 10.7% at the start of the year, as part of five promises by Rishi Sunak’s Government.

At the time, economists had forecast inflation was on track to drop to around 2.9% by the last quarter of 2023, but have reduced this to 5.1%, raising concerns the pledge could be at risk.

Chancellor Jeremy Hunt said in response that the target was “still absolutely deliverable” but stressed that there is still a long way to go to achieve this.

Jim Reid, market strategist at Deutsche Bank, reckons we live in a financial era where “inflation is always with us”, even if there are periods where it can be more dormant for several years.

A chart showing average UK inflation rates
A chart showing average UK inflation rates Photograph: Deutsche Bank

In a new research note today, Reid argues that the main cause is “fiat money” – cash directly printed and issued by governments that isn’t pegged to an underlying commodity.

Since the world effectively moved to fiat money in 1971, there is no country in the world that has averaged inflation below 2%. It is too easy to create money and run deficits, and the temptation to do that rather than take harder decisions will always be there when the inevitable and fairly regular economic and financial shocks hit.

The UK and the US are a bit more likely to have this bias than the EU due to their respective central bank mandates and stricter deficit rules, but the latter is not immune.

So even if inflation eventually mean reverts to the central bank targets this cycle, the probabilities are high that it will average above it for the rest of your careers unless you think we have a great reset at some point where markets refuse to buy any more government bonds. Even at that point central banks may simply take up even more slack.

Core inflation in the UK could remain higher than in the US or euro area until late next year, Capital Economics fears.

Ruth Gregory, their deputy chief UK economist, explains:

Inflation in the UK has stayed higher than elsewhere as the UK has endured the worst of both worlds – a big energy shock (like the euro-zone) and labour shortages (even worse than the US).

Admittedly, the upward influence of the energy supply shock is fading.

But the tighter labour market will probably mean that UK core inflation stays higher than in the US and the euro-zone until late-2024.

America’s central bank chief has warned that interest rates in the US will head higher.

Earlier this month, the Federal Reserve paused (or possibly skipped) an interest rate, by voting to leave its benchmark rate on hold.

But today, Jerome Powell told Congress that most policymakers on the Federal Reserve’s FOMC committee expect to push rates higher at future meetings.

In prepared remarks for the House Financial Services Committee, Powell says:

“Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.

Powell also says the Fed is “squarely focused” on its dual mandate to promote maximum employment and stable prices, adding":

My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2 percent goal.

Price stability is the responsibility of the Federal Reserve, and without it, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.

The pound has lost ground today, reflecting concerns that higher interest rates will trigger a recession.

Sterling has lost half a cent against the US dollar, dropping below $1.27 for the first time since last Thursday.

That suggests that the possibility of higher borrowing costs, and possibly a bumper half-point hike on Thursday, is worrying traders.

As Kit Juckes, chief global FX strategist at Société Générale, explains:

The risk of a 50bp rate hike tomorrow has increased, the risk of a deeper slowdown has increased even more.

Today’s upward inflation surprise increases the pressure on the Bank of England and raises the risk of a return to an oversized hike at tomorrow’s meeting, say the Markets 360 team at BNP Paribas.

But, their base case is for a quarter-point increase, accompanied by “more decisive language” in the minutes of this month’s meeting, or other post-meeting communications.

They predict interest rates will peak at 5.5%, a whole percentage point above today’s levels:

The bottom line, regardless of the size of tomorrow’s move, is that the MPC has a lot more work to do to bring underlying inflation under control – we stick to our terminal rate call of 5.50%.

Downing Street has insisted Rishi Sunak is still sticking with his pledge to halve inflation by the end of the year, despite inflation remaining stickily high.

The Prime Minister’s official spokesman told reporters:

“That remains the target.”

Asked if they are on track to fulfil the promise, the spokesman said the government was (despite inflation coming in above target for the last few months):

“Yes. Despite some of the coverage at the time (of the announcement of the pledge) this was never something that was straightforward.

“It was rightly an ambitious target that we remain committed to and it can only be achieved with fiscal discipline.”

Here are more details from the IFS’s new report into the financial hit from rising mortgage payments, which warns that 1.4m mortgage holders will lose 20% of their disposable income to rising borrowing costs.

IFS: Interest rate hikes could cost 1.4m people a fifth of their disposable income

Newsflash: Millions of households across Britain are expected to lose at least 20% of their disposable incomes thanks to the surge in mortgage costs expected before the next election, the UK’s leading economics thinktank has warned.

Sounding the alarm as mortgage costs reach the highest levels since the 2008 financial crisis, the Institute for Fiscal Studies said that almost 1.4m mortgage holders would see at least a fifth of their disposable income erased.

It warned the heaviest blow was reserved for those under the age of 40 with larger mortgages, with the biggest financial hit for households in London and the south east of England where property prices are typically higher than the national average.

The biggest rise is for those in their 30s, for whom payments will jump by £360 per month, or 11% of disposable income.

On average, mortgage holders will see their mortgage payments rise by £280 per month – equivalent to 8.3% of their disposable income (i.e. income after mortgage payments).

Tom Wernham, a Research Economist at IFS, explains that many borrowers face a serious shock when they remortgage.

“Many families bought homes – often with sizable mortgages – when interest rates were very low. As people’s fixed term offers come to an end they are going to be exposed to much higher interest rates.

For many, the increase in monthly repayments is going to come as a serious shock – on average it will be equivalent to seeing their disposable income fall by around 8.3%. And for 1.4 million mortgage holders – half of whom are under 40 – mortgage payments are set to rise by an eyewatering 20% of disposable income or more.

Given the cost of living pressures people are already facing due to high food and energy price inflation, these significant increases in mortgage costs could not come at a worse time.”

Updated

Back in parliament, Rishi Sunak has said it is vitally important that savers are treated fairly, following concerns that savings rates have not risen in line with borrowing costs.

Chancellor Jeremy Hunt will discuss this matter when he meets with UK banks on Friday, the PM added.

Martin Lewis of MoneySavingExpert.com says he was called to an “urgent private meeting” with Jeremy Hunt today to discuss mortgages.

Lewis says he explained that banks should offer “proper forbearance” to struggling mortgage-holders, and not ramp up their profit margins:

Duncan Robinson of The Economist questions which of the pair are actually in control….

Updated

Our economics correspondent, Richard Partington, spots some interesting detail in the UK inflation report:

Updated

Over in parliament, Labour leader Sir Keir Starmer has asked prime minister Rishi Sunak if he agrees that Britain is facing “a mortgage catastrophe” (as Conservative MP Lucy Allan warned last weekend).

Sunak replies that “it is right” to help those with mortgages, which is why the right priority is to halve inflation.

Sunak says;

Inflation is what is driving interest rates up. Inflation is what erodes people’s savings and pushes up prices, and ultimately makes them poorer.

Sunak adds that he highlighted the importance of tackling inflation before he became PM, and adds that the IMF have backed the government’s approach.

An unimpressed Starmer replies that Britain is suffering from 13 years of economic failure and last autumn’s ‘kamikaze’ budget.

Q: How much will the Tory mortgage penalty cost the average homeowner?

Sunak claims Starmer isn’t aware of the ‘global macroeconomic situation’ (earning much heckling).

Sunak says the government has taken steps to protect borrowers, including lifting support for the UK’s mortgage interest scheme (details here), the new protections agreed with the FCA, and tens of billions of costs of living support.

Starmer gives him the answer – £2,900 per year, for those who need to remortgage from 2024 (that’s according to Resolution Foundation).

Sunak shoots back that interest rates have risen in other countries, such as the US, Australia, Canada and New Zealand, and a two-decade high in the eurozone.

Our Politics Liveblog has all the action:

Updated

Hunt: Banks must live up to the commitments we agreed

Chancellor Jeremy Hunt says he wants to ensure UK banks are “living up” to commitments made to help struggling borrowers.

Hunt has held a meeting with consumer champion Martin Lewis today, a day after Lewis said the mortgage “ticking timebomb” he warned the UK government about last December has “exploded”.

Speaking after today’s meeting, Hunt says he knows many people are worried about their mortgage repayments.

He adds:

Today I spoke to @MartinSLewis ahead of my meeting with lenders on Friday.

I want to ensure banks are living up to the commitments we agreed in December, and what more they can do to help.

The FCA’s finalised guidance include options such as extending the term of a mortgage, or letting borrowers make reduced monthly payments for a temporary period.

Updated

Large increases in UK interest rates used to be rare. When the Bank of England lifted base rate by 50 basis points (half a percent) last August, it was the biggest rise in 27 years (since 1995).

That was followed by half-point hikes in September, December and February, with a monster 75-basis point rise thown in at the November meeting, before the Bank returned to smaller quarter-point hikes in March and May (up to 4.5%).

The sustained strength in UK inflation in May “cements the case” for the Bank of England to deliver further tightening at its meeting tomorrow, says Gurpreet Gill, macro strategist for Global Fixed Income at Goldman Sachs Asset Management.

Gill, who predicts rates will peak at 5.25%, says a half-point rise tomorrow can’t be ruled out:

“While our base case is for a 0.25% rate hike at this week’s meeting, the data opens the door to an increased pace of a 0.5% rate rise.

“Core and services inflation, alongside food prices, continue to diverge from moderating trends observed in other advanced economies like the US, complicating the path towards the Bank’s target.

“We see upside risks to our terminal rate forecast of 5.25%. However, downside growth risks may exert disinflationary pressure later this year.”

Here’s Sky News’s Paul Kelso on the financial market reaction to the UK May inflation report:

UK exporters have been hit by falling exports this month, but price pressures appear to be easing too.

The Confederation of British Industry (CBI)‘s monthly healthcheck of UK factories has found that order books recoveedred last month. However, the export order balance fell again to -29 from -26, the weakest since February 2021.

And on inflation….UK manufacturers expect to raise prices by the smallest amount since February 2021 over the next three months.

The CBI’s monthly index of manufacturers’ average selling price expectations slowed to +19 in June from +21 in May, its lowest in more than two years but well above its long-run average of +7.

CBI deputy chief economist Anna Leach said:

“Total order books have improved a touch in recent months, but they remain fairly soft. And although output expectations have turned positive again, growth is expected to be quite weak in the three months to September.”

Rising interest rates, and rising prices, are both hurting the budgets of low-income families.

New research from the Joseph Rowntree Foundation this morning show that the numbers of low-income households going without essentials or in arrears has not improved for over a year.

JRF senior economist Rachelle Earwaker warns that 5.5 million low-income households have had to cut down on or skip meals because they can’t afford food. Four million reported going hungry, and 2.7 million have reported having a poor diet because of the cost of living crisis.

Earwaker adds:

Low-income households are struggling to afford their bills, with 4.5 million in arrears, and 2.6 million holding high cost credit loans with loan sharks, doorstep lenders, payday lenders or pawnshops.

The JRF are calling for the Government to implement an Essentials Guarantee, to ensure that the basic rate of Universal Credit will at least always covers life’s essentials.

UK inflation surprised to the upside today, for the fourth month in a row, reports Berenberg Economics.

They have now lifted their forecasts for UK interest rates – predicting Bank Rate will have risen to 5.25% (was 5.0%) at the end of 2023 and 4.0% (was 3.5%) one year later.

Berenberg warns that UK inflation is changing its nature, and becoming more domestically driven, saying:

By and large, imported inflation caused by last year’s spike in energy and food prices is receding on trend as energy prices correct and the 2022 surge in these prices washes out of the yoy comparison. The yoy rate for goods prices eased to 9.7% from 10.0% despite higher prices for used cars.

However, the more domestically driven increase of services prices advanced from 6.9% to 7.4%. Many services are labour intensive and thus affected by strong wage gains. As reported last week, the rise in weekly average earnings (ex-bonus) accelerated to 7.5% in April from 7.1% in March.

Helped by resilient gains in employment (1.2% yoy in April), most households continue to open their wallets despite the gradually building headwind from higher mortgage rates.

A chart of UK inflation

Resolution Foundation’s chief executive, Torsten Bell, points out that there are winners from higher interest rates:

But he’s not impressed by claims that Liz Truss and Kwasi Kwarteng are somehow vindicated over last year’s mini-budget debacle:

Sticky inflation is extending the cost-of-living crisis for everyone in Britain, and hardening the mortgage crunch for the seven million households who have a mortgage.

That’s the warning from the Resolution Foundation today.

James Smith, Resolution’s research director,

“The latest data will reinforce market expectations of how high interest rates will go, and put more pressure on the Bank. This is bad news for anyone with a mortgage, who will be looking out for more positive signals before their current deal comes to an end.”

Resolution have calculated that mortgage repayments are set to rise by £15.8bn a year by 2026, meaning an average hit of £2,900 for households remortgaging.

Three-quarters of that £15.8bn hit will fall on the richest 40% of households, they add, as higher-income households are more likely to have a mortgage.

But rising prices hit poorer households more.

They add:

Inflation rates for the poorest tenth of households are 25 per cent higher than those for the richest tenth of households as they spend more of their income on food and energy bills.

Ben Franklin, research director at the Centre for Progressive Policy says the UK’s high food price inflation, and stubbornly high core inflation, are ‘particularly devastating’ news.

Although food price inflation slowed last month, to 18.3% per year from 19%, there were still some sharp increases in the prices of staples compared with last year.

The annual rate of inflation fell for eggs, potatoes, meat, bread, butter and coffee, for example:

  • Eggs: April 37.0%, May 28.8%

  • Low-fat milk: April 33.5%, May 28.5%

  • Yogurt: April 24.0%, May 23.4%

  • Potatoes: April 24.8%, May 22.4%

  • Fruit and vegetable juices: April 21.1%, May 18.0%

  • Ready meals: April 20.8%, May 16.8%

  • Meat: April 17.2%, May 16.3%

  • Bread: April 18.6%, May 15.3%

  • Margarine and other vegetable fats: April 19.0%, May 15.2%

  • Tea: April 19.1%, May 14.6%

  • Butter: April 20.1%, May 14.1%

  • Chocolate: April 14.9%, May 11.7%

  • Pizza and quiche: April 11.9%, May 9.4%

  • Coffee: April 15.3%, May 9.2%

But shoppers were hit by rising inflation on other products:

  • Sugar: April 47.4%, May 49.8%

  • Olive oil: April 46.4%, May 46.9%

  • Sauces, condiments, salt, spices and culinary herbs: April 33.9%, May 35.1%

  • Cheese and curd: April 30.6%, May 33.4%

  • Pasta and couscous: April 27.7%, May 28.5%

  • Jams, marmalades and honey: April 17.9%, May 22.9%

  • Crisps: April 14.5%, May 17.8%

  • Fish: April 14.2%, May 16.6%

  • Rice: April 14.9%, May 16.1%

  • Breakfast cereals and other cereal products: April 8.1%, May 12.3%

  • Fruit: April 10.8%, May 11.2%

  • Dried fruit and nuts: April 7.2%, May 10.3%

Rents climb at fastest rate since at least 2016

UK tenants were hit by the fastest increase in rents in at least seven years last month.

Private rental prices paid by tenants in the UK increased by 5.0% in the 12 months to May 2023, the Office for National Statistics reports.

That is the largest annual percentage change since the data series began in January 2016.

The ONS reports that rental prices in London grew at the fastest rate in a decade, saying:

In the 12 months to May 2023, rental prices for the UK (excluding London) increased by 4.9%, up from an increase of 4.8% in the 12 months to April 2023.

Private rental prices in London increased by 5.1% in the 12 months to May 2023, up from an increase of 5.0% in the 12 months to April 2023. This is the highest annual percentage change in London since October 2012.

Yesterday, property portal Zoopla reported that the average UK tenant now spends more than 28% of their pay before tax on rent, the highest in a decade.

House price inflation slowed in April, new official data shows.

The Office for National Statistics reports that average UK house prices increased by 3.5% in the 12 months to April, down from 4.1% in the year to March.

The average UK house price was £286,489 in April, which is £9,000 higher than 12 months ago, but £7,000 below the recent peak in September 2022.

It was slightly higher than the £285,057 recorded in March.

Average house prices increased over the 12 months to £306,000 in England (3.7%), £213,000 in Wales (2.0%), £187,000 in Scotland (2.0%) and £172,000 in Northern Ireland (5.0%).

The North East saw the highest annual percentage change of all English regions in the 12 months to April (5.5%), while London saw the lowest (2.4%).

Updated

Hunt economic advisor: Bank of England must create recession to curb inflation.

The Bank of England must “create a recession” to curb inflation, according to Karen Ward, chief market strategist EMEA at JP Morgan Asset Management.

Ward, who is also a member of chancellor Jeremy Hunt’s economic advisory council, told Radio 4’s Today programme there are “certainly signs” that a price-wage spiral is emerging, which the central bank “has to nip in the bud”.

Speaking after inflation remained stubbornly high at 8.7% in May, Ward explained:

“The difficulty for the Bank of England – I mean, no-one envies them their job at the moment – is they have to therefore create a recession.

“They have to create uncertainty and frailty, because it’s only when companies feel nervous about the future that they will think ‘Well, maybe I won’t put through that price rise’, or workers, when they’re a little bit less confident about their job, think ‘Oh, I won’t push my boss for that higher pay’.

“It’s that weakness in activity which eventually gets rid of inflation.”

Ward is also a member of The Times’s shadow monetary policy committee, a group of experts who are today calling for the actual MPC to raise interest rates by half a point tomorrow, to 5%.

Ward argued that the Bank of England’s “earlier hesitancy” has put it in an uncomfortable spot.

With her shadow MPC hat on, Ward told The Times:

It hoped for too long that inflation would go away on its own accord and underestimated the second-round effects now evident in accelerating wage growth.

It did not adhere to the “stitch in time saves nine” principle and now will have to raise rates by more and cause a deeper downturn to bring inflation back to target.

Updated

Here’s a breakdown of the price moves that kept UK inflation disappointingly high in May, at 8.7%:

  • Food and non-alcoholic beverages: up by 18.3% over the last year, down from 19% in April

  • Alcoholic beverages and tobacco: up by 9.3% over the last year, down from 9.1% in April

  • Clothing and footwear: up by 7.1% over the last year, up from 6.8% in April

  • Housing, water, electricity, gas and other fuels: up by 12.1% over the last year, down from 12.3% in April

  • Furniture, household equipment and maintenance: up by 7.5% over the last year, matching April’s reading

  • Health: up by 8.3% over the last year, up from 7% in April

  • Transport: up by 1.2% over the last year, down from 1.5% in April

  • Communication: up by 9.1% over the last year, up from 7.9% in April

  • Recreation and culture: up by 6.7% over the last year, up from 6.3% in April

  • Education: up by 3.2% over the last year, matching April’s reading

  • Restaurants and hotels: up by 10.3% over the last year, up from 10.2% in April

  • Miscellaneous goods and services: up by 6.8% over the last year, matching April’s reading

Buy-to-let mortgages have also become pricier.

Moneyfacts reports:

  • The average 2-year buy-to-let residential mortgage rate today is 6.44%. This is up from an average rate of 6.40% on the previous working day.

  • The average 5-year buy-to-let residential mortgage rate today is 6.31%. This is up from an average rate of 6.29% on the previous working day.

  • There are currently 2,456 buy-to-let mortgage products available. This is down from a total of 2,525 on the previous working day.

Mortgage rates rise again

Just in: UK fixed-term mortgage rates have climbed again, which will add to concerns about a ‘timebomb’ in the housing market.

The average 2-year fixed residential mortgage rate has risen to 6.15% today, data provider Moneyfacts reports, up from 6.07% on Tuesday.

At the start of May, two-year fixed mortgages were averaging 5.26%, before starting to climb as the financial markets realised UK inflation was looking worryingly sticky.

The average 5-year fixed residential mortgage rate jumped too, to 5.79%, up from 5.72% yesterday.

Almost 150 mortgage products were pulled from the market since yesterday, as lenders rushh to reprice deals.

There are currently 4,498 residential mortgage products available, Moneyfacts reports, down from 4,641 on Tuesday.

The surge in mortgage rates is splitting, some of whom want ministers should intervene to defuse Britain’s mortgage timebomb, by reintroducing tax relief on mortgage interest.

Yesterday Jake Berry, the influential chair of the the Northern Research Group of Tory MPs, told chancellor Jeremy Hunt:

“People are very concerned about what is being described as the mortgage bomb about to go off.

If we don’t help families now, all the other money that we have spent to help them will have been wasted if they lose their home.”

UK national debt hits 100% of GDP, highest since 1961

The UK’s debt pile reached more than 100% of economic output for the first time since 1961 as government borrowing more than doubled in May, according to official figures this morning

The Office for National Statistics (ONS) said net debt reached £2.6 trillion as of the end of May, estimated at 100.1% of gross domestic product (GDP).

It is the first time the debt-to-GDP ratio has risen above 100% since March 1961, except for during the pandemic, but this was later revised lower due to stronger GDP figures.

It came as government borrowing soared year-on-year to £20bn in May, pushed higher by the cost of energy support schemes, inflation-linked benefit payments and interest payments on debt.

May’s borrowing figure was £3bn lower than in April but £10.7bn higher than a year ago and the second-highest May borrowing since monthly records began in 1993.

Economists had predicted borrowing of £19.5bn for May.

Chancellor Jeremy Hunt said the Government has been taking “difficult decisions” to balance the books following the pandemic and Russian President Vladimir Putin’s invasion of Ukraine.

Hunt said:

“We rightly spent billions to protect families and businesses from the worst impacts of the pandemic and Putin’s energy crisis.

“But it would be manifestly unfair to leave future generations with a tab they cannot repay.

“That’s why we have taken difficult but necessary decisions to balance the books in order to halve inflation this year, grow the economy and reduce debt.”

Today’s inflation figure of 8.7% is “a shocker”, says Professor Costas Milas of the University of Liverpool’s Management School.

He believes it will prompt the Bank of England (BoE) into raising interest rate by half a percentage point tomorrow, to 5%, telling us:

The BoE predicted, only last month, an inflation rate of 8.22% for the second quarter of 2023.

For this to materialize, inflation needs to increase by 7.3% in June. This huge drop from the current 8.7% rate is almost unlikely to happen.

To defend its credibility, I sense the MPC will most likely feel “obliged” to raise tomorrow it’s base rate by 0.5 percentage points and assess the very effect in August’s Monetary Policy Report (and next decision). There is no interest rate decision in July….

Updated

At 8.7%, inflation remains higher in the UK than in many other advanced economies.

In the eurozone, CPI inflation fell to 6.1% in May, down from 7.0% in April.

Within the bloc, French inflation dropped to 6% from 6.9%, while in Germany it dropped to 6.3% from 7.6%.

In the US, inflation dropped to 4% from 4.9% in April, meaning prices are rising just half as fast on that side of the Atlantic.

Price pressures in the UK are being fuelled by a jobs market that is struggling to recover from the Covid-19 pandemic, Brexit visa rules and the decision by many older workers to quit the employment scene.

My colleague Phillip Inman reports:

In France, the rate of worker participation is higher than before the pandemic. That is to say, a higher proportion of working age people have a job or have registered to work. In the UK, the participation rate has declined, driving up wages and maintaining the pressure on prices.

The UK also imports more than 50% of its food, mostly from the EU, which has proved to be badly affected by rising raw materials costs. Food prices have risen at more than 18% for most of the year, pushing the overall UK inflation rate above those of rival economies.

In a new blow to mortgage holders, the cost of UK government short-term borrowing has jumped this morning.

The yield, or interest rates, on two-year British government bonds has jumped as high as 5.1% – a new 15-year high – up from 4.93% last night.

Two-year bond yields are sensitive to interest rate speculation, and are used by lenders to price mortgage rates.

Economists: Expect another interest rate rise tomorrow

City economists say that another interest rate rise tomorrow is a done deal – the only question is whether the Bank of England plumps for a quarter-point rise in rates, to 4.75%, or goes big with a half-point rise to 5%.

The Bank has already raised interest rates 12 times since December 2021, but will not be happy that inflation is still so high.

Capital Economics are now predicting that the Bank will go for the half-point rise, to 5%, due to this morning’s inflation report. They cite the increase in core inflation, saying:

A lot of attention has focussed on the fact that inflation failed to fall in line with expectations last month and was instead unchanged at 8.7%. But the bigger concern in our view is that core inflation rose yet again, hitting a 31-year high of 7.1%.

This marks the UK out from other advanced economies, including the euro-zone and the US, where core inflation has started to fall. There are several factors at play, but an important one is that inflation appears to have infected the labour market and wage setting to a greater extent in the UK than elsewhere.

While tomorrow’s MPC meeting is finely balanced, we think that a 50bps increase in Bank rate is now slightly more likely than a 25bps. The consensus remains for a smaller increase, but the markets are pricing in a 50% chance of larger move. Accordingly, a failure to deliver could cause financial conditions to loosen and the pound to weaken, which is the last thing that policymakers at the Bank need right now.

Analysts at ING say the Bank of England faces a very difficult dilemma, but suspect rates won’t reach 6%, as the markets are now pricing in.

Headline inflation should come down more noticeably over the next couple of months, owing to some pretty hefty base effects. Last June saw a near 10% spike in petrol prices, whereas prices are currently falling, and of course in July we’ll see a material fall in household electricity/gas bills. Core inflation we think should come lower too, though to a much lesser degree and mainly because of further renewed downward pressure from certain goods categories.

Headline CPI, we think, will be just below 7% by July and around 4.5% by year-end. Core inflation will probably end the year above 5%.

All of this makes life even harder for the Bank of England. We think the bar for another 50bp hike is set pretty high, but a 25bp hike is basically guaranteed, as is another in August. But markets are now fully pricing a 6% peak for the Bank rate, which implies six more rate hikes from current levels. That seems excessive, and we suspect the Bank of England would privately agree.

UK inflation data

Shares in housebuilders are falling in early trading in London.

Berkeley, Persimmon and Barratt Development are all down over 2%, among the biggest fallers on the FTSE 100 index.

That suggests traders are expecting further increases in UK interest rates, making mortgages more expensive and dampening demand for new homes.

Berkeley reported this morning that it is still seeing “good levels of enquiry for well-located homes built to a high standard of design and quality”. But it admitted that the housing market is “likely to lack urgency” until consumers have a better idea of how mortgage rates will change over the coming months.

There is a sliver of positive news in this morning’s data.

UK producers, such as factories, benefited from a drop in input costs last month, giving them breathing room to slow their price rises.

Producer input prices rose by 0.5% in the year to May, down from a rise of 4.2% in the year to April, thanks to a fall in crude oil costs.

And output price inflation – what is charged at the factory gate – rose by 2.9% in the year to May 2023, down from +5.2% in April.

On a monthly basis, producer input prices fell by 1.5% and output prices dropped by 0.5% in May.

Jeremy Hunt: Government must stick to its guns on inflation

Chancellor Jeremy Hunt has said the Government would “stick to its guns”, after inflation remained higher than hoped in May

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.”

Hunt has also called for patience, while rising interest rates have their effect on prices, saying:

“If you look at what’s happening in other countries, you can see that rises in interest rates do bring down inflation over time.

“That will happen here but we need to be patient, we need to stick to the course and then we’ll get to the other side.”

UK interest rates seen hitting 6% after core inflation shock

City investors are ratching up their expectations for Bank of England interest rate rises, following the shock rise in core inflation.

The markets are pricing in that UK interest rates will hit 6% by December, up from 4.5% today.

Traders are concluding that the BoE will be very concerned that underlying inflation, and service sector inflation, both rose in May.

The odds of a half-point increase tomorrow, when the Bank next sets interest rates, has now jumped to over 40%, according to the price of interest rate swaps.

Before the inflation data was released, such a 50-basis point hike tomorrow was seen as a 25% chance.

Jake Finney, economist at PwC says:

UK inflation has once again come in higher than expected at 8.7% in May. This is higher than the 8.5% consensus and the Bank of England’s forecast of 8.3% in May. More troublingly, core CPI - which is considered to be indicative of underlying inflation pressures - unexpectedly increased to 7.1%.

The primary culprit for the higher headline figure was services inflation, which increased from 6.9% to 7.4% due to upward pressure from cultural services. It now seems likely that services inflation will take longer to come down than the time it took to come up, especially with wage growth remaining strong.

Higher inflation means that the squeeze on household incomes isn’t over yet, despite strong wage growth. It also cements a rate hike from the Bank of England tomorrow and means an August rate hike is now more likely than not.

Updated

Today’s inflation numbers are “truly unfortunate” and show the UK has a “serious inflation problem”, reports Melissa Davies, chief econonomist at Redburn.

Davies explains:

Inflation in the UK remains ‘hot’ across the board, with both consumer goods and services keeping up the pressure on prices.

One of the reasons US inflation is so much lower, for example, is that durable goods inflation has dropped to zero, but not so for the UK, where core goods and services CPI are both running in the high single-digits.

The lagged effects of energy price changes are worth around one percentage point on the headline rate now, which will largely come through in July, but this still leaves the economy with a serious inflation issue (the contribution from fuel prices is already negative).

Davies adds that there is “a long way to go to rein UK inflation to heel.”

Food inflation falls, but still high

Food price inflation has eased in May, but products still cost much more than a year ago.

The inflation rate for food and non-alcoholic beverages dropped to 18.3% in the year to May, down from 19% in April.

During May alone, food and non-alcoholic drink prices rose by 0.9% between April and May 2023, compared with a larger 1.5% increase between the same two months a year ago.

UK food price inflation

Helen Dickinson, chief executive of the British Retail Consortium, says:

“It is a really positive sign that food inflation has fallen for the second consecutive month, the first time this has happened since the Ukraine war began.

While some prices continue to rise, we are now seeing regular news reports of falling prices on many essential products, such as loo rolls and vegetable oil. It has been good to see larger drops in inflation rates for flour, milk and eggs as retailers continue to invest heavily in lower prices for the future and locking the price of many essentials, helping the UK to deliver some of the cheapest groceries in Europe.

Elsewhere, consumers will find themselves under pressure from increased health and communication costs, as inflation rates in both categories rose in May.

Updated

ONS: Rising wages are fuelling services inflation

Grant Fitzner, the chief economist at the Office for National Statistics, says rising wages are fuelling the worrying increase in core inflation in May, to 7.1%.

Speaking on Radio 4’s Today programme, Fitzner confirms that headline inflation rate was unchanged in May at 8.7%, but adds:

In terms of what’s under the bonnet, something that may cause some concern is the continuing rise in core inflation.

That excludes food, energy, alcohol and tobacco, which has risen to 7.1%, the highest annual rate in core inflation since March 1992.

Fitzner explains that while goods inflation has been heading downwards, prices in the services sector – such as at cafes, restaurants and hotels – are rising at a faster pace.

That lifted services sector inflation to 7.4% (from 6.9% in April), which is the highest rate “in quite a while”.

This increase is probably driven at least in part by increases in wages, Fitzner suggests. [data last week showed regular pay increased by 7.2% in the three months to April, a 20-year high].

Falling prices for motor fuel led to the largest downward contribution to monthly inflation in May.

Today’s inflation report shows that motor fuel prices fell by 13.1% in the year to May 2023, compared with a fall of 8.9% in April.

Average petrol and diesel prices stood at 144.4p and 154.6p per litre respectively in May, down from 165.9p and 179.7p per litre a year ago.

Petrol prices fell by 1.4 pence per litre between April and May 2023, compared with a rise of 4.1 pence per litre between the same two months a year ago.

Similarly, diesel prices fell by 7.8 pence per litre this year, compared with a rise of 3.6 pence per litre a year ago.

On a monthly basis, consumer prices rose by 0.7% in May alone, keeping the annual rate at 8.7%.

The ONS says that “rising prices for air travel, recreational and cultural goods and services, and second-hand cars” made the largest upward contributions to the monthly inflation.

This chart shows how inflation stuck painfully high at 8.7% last month, having soared during 2022.

A chart of UK inflation

The inflation rate for goods in the UK has eased a little, from 10.0% per year to 9.7%.

But that was wiped out by a rise in service sector inflation, where the annual rate rose from 6.9% to 7.4%.

Core inflation RISES to 31-year high in blow to households

Worryingly, core inflation in the UK has risen.

If you strip out volatile factors such as food and energy, underlying inflation increased to 7.1% per year in May, up from 6.8% in April, and higher than expected.

That’s highest rate of core inflation since March 1992, which will alarm the Bank of England.

Updated

UK INFLATION STICKS AT 8.7%

Newsflash: UK inflation was unchanged last month, bringing little relief to struggling households.

The Consumer Prices Index shows prices rose by 8.7% in the year to May, matching the 8.7% recorded in April, the Office for National Statistics has reported.

That is higher than the 8.4% inflation rate forecast by City economists, and adds more pressure onto the Bank of England to keep raising interest rates.

Since peaking at 11.1% in October, inflation has dropped a little – but remains over four times above the BoE’s 25 target.

The data comes as the government is under growing pressure to intervene to help millions of households facing a “ticking timebomb” of higher mortgage payments ahead of the next election.

Updated

UK pay settlements hold at 6%

Pay awards by British employers remained the highest in more than 30 years in the three months to May, keeping pressure on the Bank of England to raise interest rates again on Thursday.

Human resources data firm XpertHR said the median basic pay settlement in the March-May quarter remained at 6%.

That matches the record increases seen in the five rolling quarters before but well below inflation which stood at 8.7% in April (we’ll find out May’s inflation rate in just a moment…..)

Wednesday’s data includes pay awards agreed in April, a key month for pay deals between employers and workers.

Sheila Attwood, senior content manager at XpertHR, explains:

“Although inflation is beginning to fall as we enter the second half of this year, it still lies far ahead of pay rises, meaning employees will remain grappling with the effects of a real-terms pay cut.”

Analysts at RBC Capital Markets predict inflation will drop to 8.4% in May, but could remain sticky.

They say:

However, with most of the downward contributions coming from fuels and food the risk is that even as headline inflation falls, services inflation (one of the indicators that the MPC have told us they are looking at for signs of persistent inflationary pressures) rises further from last month’s estimate of 6.9% y/y.

Ahead of this data, market pricing for tomorrow’s MPC decision is slightly more toward a 50bp move (32bp priced) than the unanimous expectation of 25bp amongst economists.

Larry Elliott: Sunak, Hunt and homebuyers brace for an economic Big Wednesday

Today is “crunch time”, says our economics editor Larry Elliott, who believes today’s inflation bulletin could be the most significant piece of government data published this year.

Larry explains:

It is crunch time for Rishi Sunak and Jeremy Hunt, who want voters to judge the government by the progress it makes in tackling inflation and calming the markets. Halving inflation during 2023 was one of the five new year pledges made by the prime minister in January, but the decline so far has been slower than expected. To have any hope of winning the next election, Sunak and Hunt need interest rates to come down fast.

It is crunch time for the Bank, which has the job of hitting the government’s 2% inflation target and is now facing mounting criticism. So far the brickbats have tended to come from those who say the Bank was too slow to respond to price pressures and has allowed inflation to become embedded. But there are also those who say because interest rates work with a lag, the Bank risks driving Britain into a deep recession.

Wednesday is also crunch time for the UK’s housing market and the millions of people paying mortgages. The ONS says 57% of those who took out fixed rate home loans did so when rates were below 2%. Those whose deals expire in the coming months will be refinancing at three times those rates.

Introduction: All eyes on UK inflation report

Good morning.

One of the most eagerly anticipated pieces of UK economic data in recent years will be released shortly.

May’s inflation report, due at 7am, will show if the cost of living crisis eased last month, and influence how high UK interest rates will be raised to slow the economy.

Economists expect the annual pace of inflation eased last month, to 8.4% in the year to May. That would be a small, but welcome, drop on April’s 8.7% inflation rate. But it would still mean a painful squeeze on household budgets.

Mortgage-holders will be desperate to see inflation fall, as borrowing costs have risen sharply in recent months. Yesterday, the average rate on a two-year fixed mortgage rose to 6.07%, Moneyfacts reporter, the highest since November.

Policymakers at the Bank of England are equally keen to see a slowdown in consumer price rises. The BoE’s target is to keep inflation at 2%, so it is forecast to raise interest rates for the 13th time in a row on Thursday, probably from 4.5% to 4.75%.

The BoE will also be looking at the latest figures for core inflation (stripping out food and energy), which is expected to stick at an annual rate of 6.8%.

The money markets have indicated UK interest rates could hit 6% by early next year.

Danni Hewson, head of financial analysis at AJ Bell, thinks 6% could be unlikely, though:

“Thursday’s rate rise looks nailed on but what is beginning to filter through to markets is uncertainty about what comes next. The chancellor might have ruled out government help for mortgage holders facing a horrifying cliff edge but there’s little doubt that what’s happening in the mortgage market is deeply destabilising to the economy.

“The UK might have skirted recession up until now but suck thousands of pounds out of the pockets of middle earners and all those retailers, hospitality businesses and other service sector companies are likely to take a hit, and the uptick in GDP the country enjoyed in April might not be forthcoming in the months ahead.

“And that will be the possibility being weighed up by members of the MPC ahead of their decision this week, but also the words they will use when discussing the outlook.

The government will also be crossing their fingers and hoping that inflation comes down soon, given Rishi Sunak’s target of halving it (to 5%) by the end of the year….

The agenda

  • 7am BST: UK inflation report for May

  • 9.30am BST: UK house price index for April

  • 11am BST: CBI’s industrial trends survey of UK manufacturing

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