Economists warn: Inflation is what really matters

Economists are preparing for gloomier UK inflation data next week, likely to lead to further rate hikes by the Bank of England.

It comes as the head of the UK’s official economic forecaster, the Office for Budget Responsibility, warned that the debt situation was “troubling” and that rising interest rates were putting “huge pressure” on public finances.

Forecasters predict that inflation fell from 8.7 percent in May to 8.2 percent last month. That would bring inflation to its lowest level since March last year, and will probably come as a relief to many economists after May’s numbers were the same as April’s inflation.

But any drop in Wednesday’s figure will provide little relief for struggling households, particularly mortgage payers, as inflation is well above the Bank of England’s 2 per cent target, meaning further rate hikes are likely, despite the fact that the central bank raised it 13 times in the last period. a row.

The numbers also contrast sharply with the US, where inflation fell to 3 percent in June, the lowest level in two years. The disparity is likely to put pressure on the Bank of England to take action to avoid becoming an outlier among advanced economies.

Markets are forecasting further increases, with UK key interest rates predicted to hit at least 6% by the end of the year, a level not seen since the turn of the millennium.

“Economists, politicians and central bankers will be praying for a slowdown,” said AJ Bell financial analyst Danni Hewson.

Prime Minister Rishi Sunak is among those hoping for a sharp fall in inflation after promising to bring it back to around 5.4 percent by 2023.

Marcus Brookes of Quilter Investors said the Bank of England remained in an “uneasy position” and interest rates were likely to remain high for as long as 18 months.

He added that while the inflation target could be met this year, it would become “tight” and could herald a worse economic picture towards 2024. England has raised rates significantly.’

There is some light at the end of the tunnel. Analysts at Capital Economics forecast inflation will fall ‘significantly’ in July to around 7 percent, following the reduction of Ofgem’s energy price cap early next month.

But fears of continued inflation deepened this week as official data showed regular wages rose by a record 7.3 percent in March. Yesterday, Office for Budget Responsibility (OBR) Chairman Richard Hughes said there were signs that inflation was becoming “more entrenched.”

One of the beneficiaries was UK stock markets, which were boosted by the prospect of the Fed slashing its own rate hikes.

The FTSE 100 ended the week up 0.08 percent, or 5.64 points, at 7434.57, up 2.5 percent over the five days. Sterling, meanwhile, has benefited from interest rate hikes in the UK, with the pound trading around $1.31 against the dollar after rising 2.2 percent this week.

But Interactive Investor’s Victoria Scholar warned that the rally could come to an “abrupt end” if UK inflation fell more than expected next week as traders would be forced to adjust their interest rate expectations.

Higher rates have also driven up the cost of national debt, straining public finances. This month the government sold a two-year bond, a “gilt,” with an interest rate of nearly 5.7 percent, the highest of any bond since 2007, as markets demanded higher yields.

The OBR’s Hughes commented: ‘Higher interest rates, higher inflation are hitting government finances much faster, and mean we’re going to feel the burden of interest rate rises much faster and that’s why public finances are feeling a lot more strained today. .’