Core inflation, which excludes strongly fluctuating energy and food prices, even rose from 6.8 to 7.1 percent, reaching its highest level in 31 years. Great Britain is thus losing touch with the downward trend in the USA and the EU, where inflation rates recently fell to four and six percent.
The financial markets reacted promptly to the renewed inflationary shock: stock trading in London got off to a weaker start, interest rates on British government bonds rose. The two-year Treasury yield jumped 15 basis points to nearly 5.1 percent. Investors now see a 50 percent chance that the Bank of England will raise interest rates by half a percentage point to 5 percent on Thursday. By the end of the year, they could rise to six percent.
“In services in particular, inflation is proving to be stubborn,” said Grant Fitzner, chief economist at the national statistics agency ONS. The economist also attributed this to wage developments.
UK wages had risen 7.2 percent in the three months to April, the fastest increase in 20 years. The British trade unions have been trying unsuccessfully for months to prevent workers from losing real wages with strikes.
Monetary policy has so far been unsuccessful
The stubbornly high level of inflation means that the British central bankers are increasingly in need of explanations. After 12 consecutive rate hikes, monetary authorities have made little progress towards their inflation target of 2 percent. “The Bank of England has believed that inflation is mainly caused by international factors. However, that is the wrong narrative,” said Karen Ward, chief strategist at JP Morgan Asset Management in London. In fact, the price increase is home-made and there is a risk of a wage-price spiral.
The conservative government of Prime Minister Rishi Sunak is also coming under enormous pressure. High inflation rates and rising interest rates have already pushed the premium on two-year mortgage loans to over 6 percent, causing difficulties for many homeowners who will have to refinance their loans at great expense in the coming months.
According to a study by the Resolution Foundation think tank, around 800,000 Britons will need follow-up financing in the coming year and must expect to pay an average of around £2,900 (around €3,400) more for it.
“This is catastrophic for inflation and for the government and guarantees a 0.5 percentage point hike in interest rates this week,” said Justin Moy, founder of mortgage brokerage EHF Mortgages, after the price development was announced. Further interest rate hikes would mean that mortgage rates would also continue to rise.
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Many homeowners belong to the core constituency of the 13-year Tories, who are already around 14 percentage points behind the Labor opposition in opinion polls. Conservative MPs fear for their parliamentary seats in the general elections expected next year and are calling for state aid for distressed mortgage holders and price caps for food.
Treasury Secretary Hunt under pressure
Treasury Secretary Jeremy Hunt has so far rejected both because they would fuel inflation further. The government would not hesitate to support the Bank of England in its efforts to drive inflation out of our economy while providing targeted support on the cost of living. The government will “do nothing to make high inflation last longer”. At the beginning of the year, Prime Minister Sunak promised to halve the inflation rate, which was around ten percent at the time.
However, the government’s options for action are also limited because the national debt in Great Britain is higher than the gross domestic product (GDP) for the first time since the 1960s. “This is not good news for the Treasury Secretary,” said Economist Ward.
It is counterproductive to fight the effects of inflation with state aid. The central bankers would have to slow down the economy in such a way that companies and employees could no longer be sure that they would get through with their price and wage demands. “The BoE must also risk a recession for this,” said economist Ward.
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