Core CPI rose by 7.1% in the 12 months to May, up from 6.8% in April, and the highest rate since March 1992.
CPI inflation was unchanged at 8.7% in May, despite two consecutive months of declining and an expected fall to 8.4%, renewing predictions of a 0.5% Base Rate hike at tomorrow’s MPC meeting.
The latest ONS statistics show that CPI inflation rose by 8.7% in the 12 months to May, unchanged from April.
On a monthly basis, CPI rose by 0.7% in May, compared with a rise of 0.7% in May 2022.
Core CPI (excluding energy, food, alcohol and tobacco) rose by 7.1% in the 12 months to May, up from 6.8% in April, and the highest rate since March 1992.
CPIH inflation, which includes owner occupiers’ housing costs, rose by 7.9% in the 12 months to May, up from 7.8% in April.
Rising prices for air travel, recreational and cultural goods and services, and second-hand cars resulted in the largest upward contributions to the monthly change in both the CPIH and CPI annual rates.
Falling prices for motor fuel led to the largest downward contribution to the monthly change in CPIH and CPI annual rates, while prices for food and non-alcoholic beverages rose in May 2023 but by less than in May 2022, also leading to an easing in the annual rates.
Luke Bartholomew, senior economist at abrdn, said: “The UK’s May inflation report is certainly ugly enough to keep the debate live about a 50bps hike from the Bank of England tomorrow. While the probability of such a move has increased, we still think a 25bps move is more likely, especially given the mounting dysfunctionality of the rates and mortgage markets. The importance of the coming period for a large stock of mortgage refinancing means that the Bank risks locking-in even more pronounced recessionary forces if it encourages rates markets much higher with a larger increase tomorrow.
“However, we also think that rates will now need to move above 5%, and now pencil in a terminal rate of 5.25% ahead of the Bank’s decision tomorrow.”
Adam Oldfield, chief revenue officer at Phoebus Software, commented: “To see inflation stagnate is not what we wanted, but the most worrying figure is core inflation, which actually rose in May. So, we’re under no illusion that the figure today is enough for the MPC to do anything other than increase rates again. Whether this is the right tactic in the long term is well debated, for some it’s like taking a sledgehammer to crack a walnut. However, after the large increase in swap rates last week and the flurry of mortgage rate rises, it is probably safe to say that lenders have already factored in any increase that is announced tomorrow.
“The news yesterday that the Chancellor has summoned banks to an emergency mortgage summit, after the Prime Minister said there would be no ‘Covid-like’ help more mortgage borrowers, is telling of itself. Getting the banks together to talk about forbearance is a bit like telling your grandmother to suck eggs, especially after the pandemic. With Consumer Duty on the horizon, if they aren’t already, lenders will have to be looking to identify and try to help the most exposed borrowers on their books. Yet, we have a way to go before we hit the eight per cent that was stress-tested into the mortgages that are coming to the end of their fixed-terms this year. In theory, borrowers should be able to afford the current increases, but that may not be true in the current cost of living reality.”
Jonathan Moyes, head of investment research at Wealth Club, added: “The inflation data will make for grim reading for anyone looking to remortgage later this year. Inflation just will not be bowled out. Of most concern is the rise in core CPI and services CPI, suggesting that higher food and energy prices are filtering into other areas of the economy and becoming embedded.
“This is a real headache for the Bank of England, there is a sense that the economy is increasingly fragile, financial conditions are tightening, and yet inflation continues to defy expectations. This could put a 0.50% interest rate rise on the table for tomorrow (vs the 0.25% expected). Too much tightening however, and the bank risks damage to the economy.”
Warren Lewis (Financial Reporter)