August 13, 2022

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The UK had a 40-year record inflation rate in May, the highest in the G7

The UK had a 40-year record inflation rate in May, the highest in the G7

Rising food prices have pushed annual UK consumer inflation to a 40-year record – 9.1% last month, the highest rate in the Group of Seven – and underline the severity of the UK’s cost of living crisis.

The index rose from 9.0% in April and was in line with a Reuters poll of economists. Inflation in May was the highest since March 1982 – and is set to worsen, Office for National Statistics records show.

The pound, one of the weakest currencies against the dollar this year, fell 0.6% on the day before recovering to below $1.22.

Some investors see the UK as at risk of both continued high inflation and recession, reflecting a large imported energy bill and ongoing Brexit friction that could further erode trade relations with the EU.

“With the economic outlook so unclear and no one knowing how far inflation can go and how long it will last, fiscal and monetary policy judgments are particularly tough,” said Jack Leslie, senior economist at the Resolution Foundation.

On Wednesday, the Resolution Foundation said the cost of living for families was being pushed up by Brexit, with long-term implications for productivity and wages.

Average wages have not kept pace with inflation and unions are warning of widespread strikes in the coming months.

The UK’s inflation rate in May was higher than the US, France, Germany and Italy. Japan and Canada have yet to report data for May, but neither is expected to come close.

The Bank of England said last week that inflation will remain above 9% for the next few months until it is slightly above 11% in October, when energy bills are expected to rise again in October.

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Financial markets are pointing to UK interest rates rising above 3% by the end of the year – they currently stand at 1.25% – and most economists believe weak economic growth will prompt the central bank to raise interest rates.

Food and non-alcoholic beverage prices rose 8.7% year-on-year in May – the biggest rise since March 2009, making the category the main driver of annual inflation last month.

Annual core inflation – which strips out food and energy prices to give an idea of ​​domestically generated cost pressures – fell to 5.9% from 6.2% for the first time since September, a lower-than-expected reading.

“There may indeed be some hope for the Bank of England from the fact that key price pressures are easing; (but) we doubt this will be enough to prevent further rate rises in the coming months,” said Sandra Horsfield, economist at Investec.

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