The pound fell after the release of UK inflation data by the Office for National Statistics (ONS). UK inflation rose to 9.1% in May from 9% in April making it the highest since March 1982. The ONS said rising prices for food and non-alcoholic drinks pushed up the inflation rate.
UK inflation hits 40-year high
With the prices of food, diesel and petrol rising significantly, UK inflation has reached to 9.1%, which is the highest rate in 40 years. According to the ONS, inflation which is measured by the consumer price index CPI) was the highest since 1982 and will add more pressure on struggling households. Prices for food and non-alcoholic drinks increased at the fastest annual rate since 2009. Bread, cereal, and meat were also more expensive. Prices of petrol and diesel were at record highs with motor fuels rising by nearly a third over the past year, which is considered to be the biggest annual increase since 1989.
Core inflation, which measures the cost of living without food, fuel, alcoholic drinks and tobacco, fell back last month, from 6.2% to 5.9%.
Inflation is expected to continue to rise and the Bank of England anticipates inflation to reach 11% later this year as gas and electricity prices rise.
Bank of England and rate hikes
Sterling fell as the markets expected higher inflation and are worried that the BoE might not hike interest rates as much if inflation is lower than expected. A higher inflation rate would have solidified expectations for a 50-basis points rate hike at the BoE in August.
Paul Dales, Chief UK Economist at Capital Economics said that the numbers won’t stop the Bank of England from raising interest rates further. However, it might lead the BoE to choose a 25-bps rate hike rather than a bigger 50-bps hike.
Melanie Baker, senior economist at Royal London Asset Management noted that there will be more rate hikes for the year: “It is unlikely that we’ve seen the last rate rise this year. By raising interest rates, the Bank can cool demand to bring it down in line with supply. By acting and sounding serious about tackling high inflation, they can help lower inflation expectations. However, the Bank still aren’t sending as strong a message as they could with the last set of minutes sending an ambiguous message on their interest rate outlook.” She explained that higher inflation will continue to run faster than pay growth and this will have a negative impact on the financial situation of many households. With higher prices for food and energy, and further rate hikes by the BoE, consumers will struggle. Later, on Friday, Baker anticipates that the release of consumer confidence and May retail sales data will be disappointing.
The two main contributors to inflation, food and energy, are especially significant as the poorer consumers spend more of their income on food and fuel and they are already being affected by the rising costs.
Dales at Capital Economics stated that the release does not offer substantial evidence for "more persistent inflationary pressures” that would push the Bank to act and that it is not enough to “seal the deal on a 50bps rate hike in August.” According to Capital Economics, the Bank will raise rates from 1.25% that is currently to 3.00% next year, which is much higher than the 2% expected by the majority of analysts.
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