Inflation hits new 40-year high

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The largest upward contributions to the inflation rate came from housing and household services, primarily electricity, gas and other fuels, along with transport mostly motor fuel and second-hand cars…reports Asian Lite News

Britain’s inflation hit 9.1% year-on-year in May as soaring food and energy prices continue to deepen the country’s cost of living crisis.

The 9.1% rise in the consumer price index was in line with expectations from economists in a Reuters poll and slightly higher than the 9% increase recorded in April, marking the steepest annual climb since records began in 1989.

Consumer prices rose by 0.7% month-on-month in May, slightly above expectations for a 0.6% rise but well short of the 2.5% monthly increase in April, indicating that inflation is slowing somewhat.

In its communications alongside the figures on Wednesday, the U.K.’s Office for National Statistics said its estimates suggested that inflation “would last have been higher around 1982, where estimates range from nearly 11% in January down to approximately 6.5% in December.”

The largest upward contributions to the inflation rate came from housing and household services, primarily electricity, gas and other fuels, along with transport (mostly motor fuel and second-hand cars).

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) came in at 7.9% in the 12 months to May, up from 7.8% in April.

“Rising prices for food and non-alcoholic beverages, compared with falls a year ago, resulted in the largest upward contribution to the change in both the CPIH and CPI 12-month inflation rates between April and May 2022 (0.17 percentage points for CPIH),” the ONS said in its report.

The Bank of England last week implemented a fifth consecutive hike to interest rates, though stopped short of the aggressive hikes seen in the U.S. and Switzerland, as it looks to tame inflation without compounding the current economic slowdown. The main bank rate currently sits at a 13-year high of 1.25% and the Bank expects CPI inflation to exceed 11% by October.

The U.K.’s energy regulator increased the household energy price cap by 54% from April 1 to accommodate a surge in wholesale energy prices, including a record rise in gas prices, and has not ruled out further increases to the cap at its periodic reviews this year.

A recent survey showed that a quarter of Britons have resorted to skipping meals as inflationary pressures and a food crisis conflate in what Bank of England Governor Andrew Bailey has dubbed an “apocalyptic” outlook for consumers.

Along with the external shocks facing the global economy — such as food and energy price surges amid the war in Ukraine and supply chain problems due to lingering Covid-19 pandemic bottlenecks — the U.K. is also navigating domestic pressures, such as the unwinding of the government’s historic pandemic-era fiscal support, and the effects of Brexit.

Economists have also flagged signs of a tightening of labour market conditions and headline inflation filtering through to the broader economy.

Meanwhile, Sterling fell against a stronger U.S. dollar but came off near one-week lows hit shortly after the data. By 0927 GMT it was down 0.4% at $1.223 following two days of gains. Versus the euro , the pound fell 0.2% to 85.96 pence.

“The reaction among currency traders was to send sterling lower, as investors fret that rising prices could trigger a slowdown in UK growth during the rest of the year,” said Matthew Ryan, head of market strategy at Ebury.

“Conversely, we think that the data may end up being bullish for sterling should it encourage the Bank of England to raise interest rates more aggressively,” he added.

The BoE raised its benchmark rate by 25 bps to 1.25% last Thursday and said it was ready to act “forcefully” if needed to stamp out dangers posed by inflation, although that lagged stronger action from other central banks including the U.S. Federal Reserve.

ING said it saw scope for a 50 bps BoE rate hike in August.

“UK inflation remains above 9% and the recent rise in energy costs will probably help the headline rate go slightly into double-digits from October,” said ING economist James Smith.

“The chances of a 50bp Bank of England rate hike in August are rising, though we think there’s only so much further it can hike in the current fragile growth environment,” he added.

Traders were also keeping an eye out for two by-elections on Thursday: one in Tiverton and Honiton and another in Wakefield in northern England. read more

Defeat in either place may further dent Prime Minister Boris Johnson’s vote-winning reputation, and see lawmakers who fear for their futures try to move against him despite giving him a reprieve by calling and losing a confidence vote against him earlier this month.

Concerns over the British economy and the slower pace at which the BoE is expected to tighten policy compared to other central banks have made investors bearish on the pound. The net short position now stands at $4.8 billion, but has fallen from a peak hit in May of $6.3 billion, the largest short since September 2019.

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