- CPI sticks at 8.7% in the 12 months to May
- Core inflation (CPI) rises from 6.8% to 7.1%
- Food inflation drops to 18.3%, but service sector inflation rises to 7.4%
Danni Hewson, AJ Bell head of financial analysis, comments on the latest UK inflation numbers and rising public sector debt:
“Markets had been erring on the side of caution when it came to pricing in how quickly UK inflation is falling, but the news that there’s been no change in the headline CPI rate will send something of shiver through even the hardiest spectator.
“Inflation had been expected to fall – at least a bit – but it hasn’t obliged, remaining stubbornly sticky and cementing the prospect of a rate rise tomorrow as well as raising expectation that the hike will be higher than had been previously anticipated.
“There is a tiny bit of good news hidden in this troubling update from the ONS and that’s the rate at which food prices are rising, which has slowed, but it will be little comfort to all those facing huge increases in their monthly mortgage payments.
“Savings cushions have been eroded over the past year and there will be many households facing the real prospect of being unable to keep paying for the roof over their heads.
“And these inflation numbers show the Bank of England still has a big job to do if they’re to root out the inflation which seems to have become embedded in the very fabric of our economic lives.
“Central bankers will be chilled by the news that inflation is up in the service sector. Prices in bars and restaurants, cinemas and museums, chiropractors and dentists have all risen as those much-discussed wage hikes begin to filter through.
“Previous comments about wage restraint might have fallen as flat as a pint of warm lager but they were rooted in a real fear that a wage price spiral was nigh; and beating back rising prices in the service sector is a lot more difficult than tackling the rising price of goods.
“With a tight labour market comes the pressure on employers to keep their skilled workforce happy, which is increasingly difficult as that workforce becomes even more inflation weary.
“They’ve battled through high energy costs, switched supermarkets and traded down for some of those nice to haves, but the huge numbers some homeowners are facing when they come to re-mortgaging will undoubtedly put pressure on employers to hike wages further in the coming months.
“There will be more pressure on the government to step in and help struggling homeowners, especially as an election creeps ever closer. But another set of figures has also been released today which shows that public sector net debt has surpassed 100% of GDP for the first time since March 1961.
“Support for struggling households during Covid and the energy crisis has come with a significant price tag as benefits have been uprated and the government is also being hit with higher wage costs.
“We were warned that the medicine required to cure our inflationary ailment would taste foul, but the reality is proving more unpalatable than many had expected.
“Two-year gilt yields have shot up to the highest since 2008 and markets are now split on whether the Bank will raise rates by just a quarter percent or go further, with a 50 basis point hike now very much in play.”
