Jeremy Hunt today supported brutal rate hikes despite fears of a mortgage collapse and recession – after inflation defied expectations by remaining at eye-watering levels last month.
The total CPI in May was 8.7 percent, the same as in April. Analysts had expected a drop to 8.4 percent.
In a particularly grim sign, core inflation even rose to 7.1 percent, the fastest rate since 1992.
The ‘stickiness’ of price increases – which remain significantly higher than in other countries – raised concerns that inflation has become embedded in the economy. A member of Mr Hunt’s economic advisory board stressed that there is no way to avoid pain for homeowners and that the Bank of England must ‘create a recession’.
There is speculation that Threadneedle Street could now opt for a half point increase to 5 per cent when the Monetary Policy Committee meets tomorrow, instead of the previously expected 0.25 percentage point.
While the pressure on Britons is mounting today:
- Markets are pricing base rates down to 6 percent by Christmas, potentially adding hundreds of pounds a month to mortgages.
- According to Moneyfacts, the average two-year fixation now stands at 6.15 percent;
- The interest rate on two-year government bonds – the government’s way of borrowing – peaked this morning at a new 15-year high of nearly 5.09 percent;
- Separate figures showed that the government’s £2.6 trillion mountain of debt is equivalent to 100.1 per cent of GDP, the highest ratio since 1961.
The total CPI in May was 8.7 percent, the same as in April
Chancellor Jeremy Hunt said he would support the Bank of England to ‘squeeze inflation out of our economy’
The ‘stickiness’ of price hikes – which remain significantly higher than in other countries – will anchor inflation concerns in the economy
According to Moneyfacts, the average two-year fixation now stands at 6.15 percent
While there was some relief when food inflation eased slightly from 19 percent to 18.3 percent, core inflation rose from 6.8 percent in the year to April to 7.1 percent in the year to May. That was the highest rate in more than 30 years.
The Chancellor said: “We know how much high inflation is hurting families and businesses across the country, and our plan to halve the rate this year is the best way to keep costs and interest rates low.
“We will not hesitate to support the Bank of England in its effort to squeeze inflation out of our economy, while also providing targeted cost-of-living support.”
Mr. Hunt is meeting with lenders on Friday to urge them to show patience with people who are having trouble paying mortgages.
But he has ruled out direct support and says the government “will stand by its position.” “If you look at what’s happening in other countries, you can see that interest rate hikes tend to reduce inflation over time,” he said.
“It’s going to happen here, but we have to be patient, we have to keep the course and then we’ll get to the other side.”
JP Morgan’s Karen Ward, a Treasury adviser, told BBC Radio 4’s Today program that there are ‘certain signs’ that a price-wage spiral is brewing, which the central bank needs to ‘nip in the bud’.
“The difficulty for the Bank of England – I mean, no one is jealous of their jobs at the moment – is that they have to create a recession.
“They have to create uncertainty and vulnerability, because only when companies are nervous about the future will they think, ‘Well, maybe I’m not going to make it through that price hike,’ or employees, if they’re a little less confident about their jobs, will think ‘ Oh, I won’t push my boss for that higher pay.”
“It’s that weakness in activity that eventually gets rid of inflation.”
Ms Ward also said the Bank of England has been ‘too hesitant’ about raising interest rates.
Despite the shocking numbers, Downing Street insisted that Sunak is still on track to fulfill his pledge to cut inflation in half by the end of the year.
The Prime Minister’s official spokesman said: “That remains the goal.”
When asked if they are on track to fulfill the pledge, the spokesman said: “Yes. Despite some of the coverage at the time (from the pledge announcement) this was never something that was easy.
‘It was rightly an ambitious target that we continue to adhere to and that can only be achieved with fiscal discipline.’
The ONS said rising prices for airline tickets, recreational and cultural goods and services and used cars contributed most to inflation.
Motor fuel costs fell, the ONS said, putting the biggest downward pressure on inflation.
Chief Economist Grant Fitzner said: “Following last month’s decline, annual inflation rates have changed little in May and remain at historically high levels.
Airfare costs increased over a year ago and are at a higher level than usual in May. Rising prices for second-hand cars, live music events and video games also helped keep inflation high.
These were compensated by a fall in the price of petrol. Food price inflation remains high, but the pace has slowed somewhat this month and costs have risen more slowly than this time last year.”
The Federation of Small Businesses (FSB) pleaded with the Bank of England for ‘moderation’ with rate hikes.
FSB national chairman Martin McTague said: “Today’s rise in core inflation will understandably make many nervous.
‘The consequences of further interest rate hikes are far from trivial for small entrepreneurs.
Higher interest rates will further tighten the pocketbook and stifle the growth and prosperity of our small business sector.
“The potential economic impact of high interest rates is not limited to balance sheets – it will affect every aspect of our society from employment figures to consumer spending and beyond, so we urge the Bank of England to exercise moderation.”
There is speculation that Threadneedle Street could now opt for a half point increase to 5 per cent when the Monetary Policy Committee meets tomorrow, instead of the previously expected 0.25 percentage point.
Analysts had expected a fall in the CPI to 8.4 percent
Shadow Chancellor Rachel Reeves said: “This Tory government cannot get this problem under control because they are the problem.
Thirteen years of the Tories and their disastrous mini-budget endanger our economic security and make families worse off.
Just continuing on this Tory path of controlled decline is not the pinnacle of Labour’s ambition.
“We need a more secure economy, more secure family finances and a plan to help us seize the opportunities ahead.”
Separate ONS figures showed that the UK’s £2.6 trillion mountain of debt is larger than the entire economy for the first time since 1961.
Net debt reached 100.1 percent of GDP in May as government borrowing more than doubled from last year.
It is the first time since March 1961 that the debt ratio has risen above 100 percent.
The threshold was initially thought to have been crossed during the pandemic, but the ratio was later lowered due to stronger GDP numbers.
Borrowing was £20bn for the month, pushed higher by the cost of energy support schemes, the benefit bill and interest payments.
The figure was £10.7bn higher than a year ago and the second highest loan in May since monthly records began in 1993.
Economists had forecast a loan of £19.5 billion for May.
Chancellor Jeremy Hunt said the government has taken “tough decisions” to take stock of the pandemic and Russian President Vladimir Putin’s invasion of Ukraine.
“We have rightly spent billions to protect families and businesses from the worst impacts of the pandemic and Putin’s energy crisis,” he said.
“But it would clearly be unfair to leave future generations with a bill they can’t repay.
“That’s why we’ve made tough but necessary decisions to balance the books to cut inflation in half this year, grow the economy and reduce debt.”