Get set for inflation set to reach another 40-year high

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Pressure for bigger interest rate rises likely to follow multi-decade highs for rising prices

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emperatures may be set to ease by Wednesday but for shoppers there will be no respite from the white heat of the cost of living crisis.

That morning the Office for National Statistics are set to reveal that the main measure of inflation, the Consumer Price Index (CPI) reached a new 40 year high in June. City forecasters expect a figure of 9.3% , up from 9.1% in May, as spiraling fuel, energy, food and other day to day prices continue to wreak havoc on family budgets.

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The higher figure for June may also reflect the impact of higher spending during the Jubilee Weekend celebrations.

“We might well have seen a rebound in food sales as a result of the four-day bank holiday weekend,” says Michael Hewson, chief market analyst at CMC Markets.

“It’s been a painful year for consumers in the UK, with collapsing consumer confidence and rising prices exercising an increasing pinch on disposable incomes. The economic outlook hasn’t been helped by an increase in tax rates, which came into effect in April, at the same time as energy bills rose.”

The CPI number may increase pressure on the Bank of England to take on inflation more aggressively with bigger interest rate rises, before summer’s record temperatures fade and consumers face rising heating costs. The BoE itself predicts inflation peaking at around 11% in the autumn but some City scribes say it could go even higher.

The BoE favors “light touch” rises of 0.25%, the steps it has used to take the base rate to 1.25% from record lows touched during the height of the Covid-19 pandemic. Analysts have talked up the prospect of bigger base rate jumps, especially since official data showed the UK economy grew unexpectedly in May, giving the monetary policy committee more room to act. Its next meeting is on August 4.

Matthew Ryan, head of global strategy at Ebury, the financial services firm, says recent comments in speeches by MPC members have been “hawkish”, and alongside the signal being sent by the “likely … multi-decade record” for CPI, the MPC could go for “a double-sized 0.50% hike in August.

Such a move would instantly increase the mortgage payments of borrowers on variable-rate repayments rather than fixed-interest rate loans, further limiting spending power.

Other central banks have already been bolder. The Bank of Canada went for a full 1% increase at its last meeting, while the US Federal Reserve has hiked by 0.75% and is likely to do so again at the end of July. The European Central Bank makes its next announcement on Thursday, amid speculation that it could agree an increase of 0.75%, especially since it is behind its peers having yet to start tightening rates.

Hetal Mehta, senior European economist at Legal & General Investment Management, says UK inflation is “yet to peak”, and the BoE faces “a tricky balancing act.” with “credit conditions tightening and job vacancies moving lower.” She adds: “Getting inflation – and inflation expectations – lower will mean more rate increases in the coming few months.”


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