- Persistent Inflation and Anticipated Interest Rate Hike
- Government’s Stance and Calls for Recession
- Impact of Rising Core Inflation and Wage Increases
Inflation has remained persistently elevated, so it is anticipated that interest rates will increase once more.
In May, inflation, which measures the rate at which prices rise, was 8.7%, the same rate as in April.
The unexpected figure was caused by the rising cost of flights and used automobiles, but food and energy prices are already putting a strain on household budgets.
On Thursday, it is widely anticipated that interest rates will increase by 0.25% to 4.75 %, but some speculate that they could reach 5%.
The Bank is responsible for maintaining inflation at 2%, but the current rate is four times higher.
Since the end of 2021, the Bank of England has been progressively increasing interest rates. This makes borrowing money more expensive and encourages people to borrow less and spend less, which should lower prices.
This has led to concerns regarding loans, particularly mortgages, as one-third of adults in the United Kingdom face substantial repayment increases when their fixed-term agreements expire. Also at risk of being priced out of the market are first-time purchasers as lending conditions tighten.
Wednesday’s average two-year fixed mortgage rate was 6.15 percent, while the average five-year rate was 5.79 percent.
Chancellor Jeremy Hunt appeared to support further interest rate hikes on Thursday, stating that the government would not “hesitate in its resolve to support the Bank of England as it seeks to squeeze inflation out of our economy.”
Rachel Reeves, Labour’s Shadow Chancellor, blamed the Conservative government for failing to “get a grip” on inflation.
The bank must induce a recession.
Karen Ward, a member of Mr. Hunt’s economic advisory council and chief market strategist at JP Morgan Asset Management, stated that the Bank needed to “create a recession” to curtail soaring prices because it had “been too hesitant” in its interest rate hikes thus far.
Ms. Ward stated there were indications that wage increases were contributing to price inflation.
She stated that the Bank must “create uncertainty and fragility” in the economy to slow the rate of price growth.
“Only when companies are uncertain about the future will they think, ‘Well, maybe I won’t implement that price increase,’ or when workers are less confident about their jobs will they think, ‘Oh, I won’t ask my boss for a rise,'” she told.
Bidfood UK CEO Andrew Selley said raising interest rates was “not the right thing to do.
“It suffocates the economy. They must consider alternative means of assisting enterprises so they can weather the storm, he said.
Concern about a pay rise
The Bank determines interest rates using the “core” inflation rate, which excludes energy, food, alcohol, and tobacco prices.
In May, core inflation rose to 7.1% from 6.8% in April, its highest level since March 1992.
Grant Fitzner, the chief economist at the Office of National Statistics (ONS), which produces economic data for the United Kingdom, stated that rising service prices in cafés, restaurants, and hotels drove the increase.
“This is likely due, at least in part, to the increase in wages,” he continued.
According to Yael Selfin, the chief economist at KPMG UK, rising core inflation suggests that companies may be passing on the costs of higher wage bills to consumers,” she said.
Excluding the impact of the pandemic, wages in the United Kingdom have increased at the fastest rate in the past two decades, but they continue to languish behind the rate of inflation.
This is a dismal figure. Inflation is not merely obstinate or adhesive. According to the most recent numbers, it is stagnant. In other nations, including the United States and Germany, these numbers have already begun to decline.
At 7 a.m., my inbox was flooded with immediate reactions ranging from “unfortunate” to “challenging” to “catastrophic.”
The number released on Wednesday indicates that the delicate balance between inflation and recession is becoming more difficult. It may be necessary for more than just the Bank of England to perform the necessary labor.
Many households have struggled financially due to salary stagnation.
In May, food price inflation was 18.3%, a decrease from April’s 19.0%.
Sergio Ronga, owner of Nanninella Pizzeria in Brighton, said growing costs forced him to boost prices.
According to him, the prices of his ingredients have skyrocketed, with tomatoes nearly doubling in price, flour increasing by 60 percent, and cheese increasing by 50 percent.
Sarah Coles, chief of personal finance at Hargreaves Lansdown, stated that although food price inflation had slowed, it was still “causing agony at the cash registers.”
“Costs have escalated so far and so quickly that we will not see a return to their previous levels. In the majority of instances, prices will not decline; rather, they will increase at a reduced rate.
Separately, figures also disclosed on Wednesday revealed that for the first time since 1961, the national debt exceeded the UK’s economic output.
