Afternoon summary
Time to recap, after a day dominated by depressingly high UK inflation.
The Bank of England might need to spark a recession to finally get price rises under control, an economist who advises Chancellor Jeremy Hunt has warned, as inflation remained persistently high in May.
Karen Ward, chief market strategist EMEA at JP Morgan Asset Management, told Radio 4’s Today Programme that the BoE must fight against a wage-price spiral taking hold in the UK.
Ward said:
“The difficulty for the Bank of England – I mean, no-one envies them their job at the moment – is they have to therefore create a recession,” she said.
“They have to create uncertainty and frailty, because it’s only when companies feel nervous about the future that they will think ‘Well, maybe I won’t put through that price rise’, or workers, when they’re a little bit less confident about their job, think ‘Oh, I won’t push my boss for that higher pay’.
“It’s that weakness in activity which eventually gets rid of inflation.”
Ward was speaking after inflation in the UK unexpectedly remained stuck at 8.7% in May, adding to the pressure on households suffering a surge in mortgage costs.
The Office for National Statistics reported that good inflation slowed, but services inflation accelerated at a faster pace in May.
Core inflation, closely watched by the BoE jumped to a 31-year high.
The money markets are now predicting that UK interest rates will have hit 6% by around the end of 2023.
Markets now bet on a 2024 New Year
— Emma Fildes (@emmafildes) June 21, 2023
BoE base rate hangover of 6% - prolonging financial pain for homeowners & landlords. pic.twitter.com/QuK0LT6KzV
The Bank sets UK interest rates tomorrow – a hike is nailed-on, with some economists suggesting it could lift borrowing costs by half-a-percent, to 5%. The majority expect a smaller, quarter-point, increase to 4.75%.
Mortgage holders are being hit by higher rates – Moneyfacts reported that the average two-year fixed-term mortgage now costs 6.15%, up from 6.07% on Tuesday.
More than 1 million households across Britain are expected to lose at least 20% of their disposable incomes thanks to the surge in mortgage costs expected before the next election, the Institute for Fiscal Studies has warned.
Tenants are also suffering, with rents rising at the fastest pace for 7 years.
And the boss of Berkeley Group has said the property market will remain “choppy” until interest rates settle, as the housebuilder forecast a 20% drop in sales this year.
In other news….
UK government debt has surpassed GDP for first time in 62 years
Some of the UK’s best known retailers including WH Smith, Marks & Spencer, Argos and LloydsPharmacy are among more than 200 companies collectively fined £7m for failing to pay the legal minimum wage.
The TransPennine Express train service has got “worse rather than better” since transferring to the state-owned operator of last resort (OLR), according to the rail minister, Huw Merriman.
Matt Moulding, the founder and chief executive of the online retail platform THG, has finally given up his “golden” share allowing him to block any attempt to takeover the company.
Our Politics Liveblog are covering the Westminster reaction to today’s inflationo report, here:
With UK inflation so sticky, Rishi Sunak’s pledge to halve the UK’s rate of inflation is looking trickier than when he made it.
My colleague Phillip Inman explains:
May’s data shows that most of the price rises are in areas of discretionary spending, like holidays, recreation and entertainment.
Britons have always demanded foreign holidays. And after three years of uncertainty and long periods of restrictions on travel, the sale of flights has rocketed. No one seems to mind that the airlines are hoping to recover some of their pandemic losses with much higher ticket prices.
Sunak could still score a victory. He has six months to go. Some of the biggest increases in energy and food prices happened last summer and these will not be repeated over the coming few months, which should mean inflation drops to 5% quite quickly.
Still, he thought it was going to be his easiest win and now it looks like being a Johnsonian gamble. He seems to have misread the UK economy, or at least the capacity of businesses to keep increasing prices without much justification. In that, he is not alone.
