Rapid elevation of prices surpasses predicted levels prior to Bank of England gathering
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The year-on-year inflation clocked in at 3.4% as per the recent data, a figure that the Bank of England's policymakers will scrutinize before they make their interested rates call on Thursday.
Data released by the Office for National Statistics displayed a slowdown in the growth of services prices, which rate-setters keep a close eye on, from 5.4% in April to 4.7% in May.
According to a Bloomberg survey, analysts projected inflation to reach 3.3% in the 12 months to May. However, Goldman Sachs forecasted a higher figure, while Pantheon Macroeconomics' predictions were more conservative.
The ONS reported a rise in the cost of chocolates, meat products, and household goods, which pushed up the inflation rate. Yet, price decreases in air fares and moto fuel costs offset the increase.
Richard Heys, ONS' chief economist, stated, "A cornucopia of competing price adjustments resulted in minimal inflation change in May."
Chancellor Reeves declared that the government made the "vital choices" to manage inflation compared to the soaring rate recorded in late 2022 under Liz Truss' tenure. However, the recent surge beyond 3% can be attributed to employment tax hikes to some extent.
Reeves further added, "We are aware there's more to achieve. Last week, we expanded the £3 bus fare cap, funded free school meals for over half a million more children, and are implementing our plans for free breakfast clubs for every child in the country. This government is pumping resources into Britain's renaissance to make the working class better off."
Suspicions surrounding the ONS' data handling stirred up more closely this month following last month's inflation figure correction from 3.4% to 3.4% due to a tax calculation error - a rare occurrence that has shaken the trust in the national statistics body.
Despite the change, the ONS kept its previously recorded April inflation data at 3.5% in adherence to its self-imposed procedures.
In the Bank of England's MPC minutes to its monetary policy decision, which is set to be unveiled to the public at midday on Thursday, there is a possibility of a reference to the ONS' handling of critical data.
Analysts expect the MPC to hold rates at 4.25% due to concerns over high wage growth. With inflation projected to stay above 3% for the remainder of the year due to increased government spending, National Institute for Economic and Social Research (NIESR) economist Monica George Michail said, "The current turbulence in the Middle East is adding to economic unpredictability.”
"The Bank of England is likely to maintain rates this Thursday and implement a solitary cut this year," she added.
Ruth Gregory from Capital Economics highlighted the surge in food price inflation to a level not seen since early February as a worry for rate-setters. "With the increase in food price inflation, it appears retailers might be starting to incorporate more of the additional national insurance contributions into their selling prices," she said.
British Retail Consortium insight director Kris Hamer echoed similar sentiments, citing the climb in food price inflation as a consequence of high street shops' inability to fully absorb the extra labor costs imposed by the government.
"Abolishing any shop from bearing more under the business rates reform would be an important step, providing meaningful relief to an industry that continues to witness rising prices, job losses, and store closures," Hamer commented.
Bank officials are also concerned with consumers and firms' high inflation expectations for the year, given the lack of confidence in the UK economy. However, dovish rate-setters Alan Taylor and Swati Dhingra have advocated for more interest rate cuts due to President Trump's fierce trade policy, which is expected to leave the world economy crippled.
Dhingra has argued that tariffs will eventually lead to a decrease in prices as cheaper goods will likely flood the UK. Even though Trump has reduced tariffs on some of the US' major trading partners, international economists at the World Bank and IMF predict these measures will drag down GDP growth.
In the upcoming meeting, the Bank of England's MPC might shed some light on their thoughts regarding the impact of global trade on UK inflation. However, some economists caution that companies may increase prices to deflect concerns.
- The unstable economic scenario, with inflation at 3.4%, has led analysts to carefully consider their investments in finance, including the insurance sector, due to the impending Bank of England's rate decision.
- The recent surge in inflation, caused by factors such as increased government spending and employment tax hikes, might influence the growth trajectory of various sectors in the economy, necessitating a careful review of investment strategies in finance and beyond.
