UK consumer inflation remained elevated in May, putting more heat on the Bank of England, data from the Office for National Statistics showed on Wednesday.
The UK annual inflation rate was unchanged at 8.7% in May, where it had landed in April. Inflation had been expected to cool to 8.4%, according to market consensus cited by FXStreet, so the latest figure was hotter-than-forecast.
Rising travel prices, second-hand cars, as well recreational and cultural goods and services drove the yearly inflation rates upwards. At the other end, falling prices for motor fuels pulled CPI in the opposite direction.
Wednesday's reading will put pressure on the Bank of England, on the eve of its interest rate decision. The BoE on Thursday is expected to lift bank rate to 4.75%, from 4.5%, in order to move towards its target inflation rate of 2%.
Inflation in the UK is proving stickier than in other major economies, with the headline rate in May having cooled to 6.1% in the eurozone, and 4.0% in the US.
On a monthly basis, prices rose 0.7% in May, cooling off slightly from a 1.2% rise in April from March. The figure topped consensus expectations of a 0.5% rise, however.
Core consumer prices, which exclude volatile categories such as food, energy, alcohol and tobacco, rose 7.1% on-year in May. Market consensus had expected the reading to be unchanged from 6.8% in April, so also coming in higher than expected.
Meanwhile, ONS figures also showed annual producer input price inflation cooled to just 0.5% in May from an upwardly revised rate of 4.2% in April. This reading was expected to come in at 1.2% for May. April's reading was previously estimated at 3.9%.
“Crude oil saw a fall in the year to May 2023 of 35% and this is the most dominant slowing effect on the annual input inflation rate,” the ONS explained.
From the previous month, producer input prices fell 1.5%, compared to a 0.1% fall in April. Market consensus had expected a 0.5% fall.
“This is the biggest monthly decrease since April 2020 and is notably down from the record monthly increase of 5.1% in April 2022 as a result of the conflict in Ukraine and the immediate impact this had on crude oil prices,” the ONS said.
In response, several housebuilders were among the top fallers on the FTSE 350 index as the prospect of yet another interest rate hike tomorrow will drive up borrowing costs.
This could prove damaging to the property market as affordability issues become more acute, according to Danni Hewson, head of financial analysis at AJ Bell.
“There are already ripples across the housebuilding sector, with Berkeley Group guiding for 20% lower sales for the year to March 2024. It has also raised a warning around signs of financial distress in the supply chain which is a worry.”
For variable mortgage holders, the stickiness could mean more pain as many would have expected rates to start easing by now. But, according to Sarah Coles, head of personal finance at Hargreaves Lansdown, the picture is even bleaker for those looking for a fixed rate.
“It has already been a torrid few weeks, as mortgage rates have shot up. The market is pricing in several hikes over the coming months. Just ahead of the announcement, it was expecting rates to peak at 5.81% in February, and only start to fall gradually from there. This has pushed the average two-year fixed rate mortgage over 6%.
“Higher core inflation is likely to reinforce the market’s conviction that rates will need to go significantly higher, and could power even higher rate expectations further down the line. Even the concern that rates could rise would bring more mortgage misery for anyone looking for a new deal or facing a remortgage.”
