Soaring food costs propelled British consumer price inflation to a 40-year high of 9.1 percent last month, the highest rate out of the Group of Seven countries and one which shows the severity of the country’s cost-of-living constraint.
The reading increased from 9.0 percent in April and was in line with the opinion of economists surveyed by Reuters. The Office for National Statistics’ records indicate that May’s inflation was the highest since March 1982, and it is likely that it will go worse.
Sterling, one of the weakest currencies versus the U.S. dollar this year, dipped below $1.22, down 0.6 percent on the day, before subsequently recovering.
Given its high energy import cost and continued Brexit-related tension, which could further erode trade relations with the European Union, some investors believe that Britain faces a danger of both chronically high inflation and recession.
According to Jack Leslie, senior economist at the Resolution Foundation think tank, “with the economic future so uncertain, no one knows how high inflation could go, and how long it will persist for.” This makes decisions about fiscal and monetary policy particularly difficult.
The Resolution Foundation stated earlier on Wednesday that the cost-of-living damage to households was being exacerbated by Brexit, which would have negative long-term effects on productivity and wages. read more
Trade unions have warned of extensive strikes in the upcoming months as a result of average salary not keeping up with inflation. Railway personnel have already launched major walkouts this week.
Britain’s headline inflation rate in May was greater than in the United States, France, Germany and Italy. Although Japan and Canada have not yet provided data on consumer prices for May, neither is probably going to come close.
In the midst of the coronavirus illness (COVID-19) outbreak, a man shops for fruits and vegetables at Brixton Market on September 27, 2020, in London, Britain. Simon Dawson for Reuters
The Bank of England indicated last week that inflation was anticipated to remain over 9 percent over the following months before peaking at little above 11 percent in October, when regulated residential energy rates are due to rise again.
Although most analysts believe that the BoE will raise rates by less than that due to slowing economic growth, financial markets indicate that interest rates in Britain are on track to soar beyond 3 percent around the turn of the year from their current level of 1.25 percent.
After the statistics, the British government was doing everything it could to resist an increase in prices, and the central bank will act “forcefully” to curb inflation, according to Finance Minister Rishi Sunak.
Prices for food and non-alcoholic drinks grew by 8.7 percent in annual terms in May – the highest jump since March 2009 and making this category the biggest driver of annual inflation last month.
Lower-than-expected annual core inflation, which excludes food and energy costs to provide a picture of domestically produced cost pressure, dropped to 5.9 percent from 6.2 percent for the first time since September.
According to Sandra Horsfield, an economist with Investec, “the Bank of England may indeed derive some hope from the fact that core price pressures are receding (but) we doubt this… would be enough to avert more rate rises in the coming months.”
The ONS reported that overall consumer prices increased by 0.7 percent in monthly terms in May, slightly more than the 0.6 percent estimate.
The ONS reported that the cost of materials and energy paid by British factories—a major influence in the prices that customers ultimately pay in stores—was 22.1 percent higher in May than it was a year earlier. This is the largest increase since these records began in 1985.