UK inflation has hit its highest level in 40 years, with the consumer price index sitting at 9.4% over the 12 months to June.
The Office for National Statistics (ONS) recorded inflation at 9.1% in the year to May, up from 9% in April. Expectations had been for the June CPI figure to reach 9.3%, providing further evidence that inflation’s dizzying ascent has not yet run out of steam.
It is of little surprise that the catalyst for the rise has been fuel and food price hikes.
The cost of a litre of petrol went up by 18.1p in June, on average, which was the largest monthly rise since 1990, according to the ONS. Diesel went up by 12.7p per litre.
See also: Bank of England votes 6-3 to deliver further 25bps rate hike
All eyes on Threadneedle Street
The latest figures have brought focus back to the prospect of a recession in the UK later this year, something markets have taken note of, according to IG Group chief market analyst Chris Beauchamp.
“There is now every expectation that the Bank of England will move by 50bps at its next meeting, finally closing some of the gap on the hawkish Fed,” he said.
Three members of the monetary policy committee (MPC) voted for a 50bps-hike at its last meeting in June, but they were outnumbered and a 25bps increase was pushed through instead.
Beauchamp added: “But the pound’s lacklustre reaction to [today’s] news shows that markets are increasingly worried about a UK recession, thanks to the squeeze on consumers both from higher prices and increased borrowing costs.”
Bank of England governor Andrew Bailey (pictured) will now be under greater pressure to act.
A rate rise of 25bps had been expected prior to this new data. However today’s developments, along with stronger than expected GDP growth in May of 0.5%, mean more are expecting bolder action from the MPC.
“The Bank of England will be feeling the heat of the past few days and has a very difficult job on its hands to ensure the economy has a soft landing,” said Richard Carter, head of fixed interest research at Quilter Cheviot who warns the economy could be tipped into contraction if more extreme rate rises are required.
“However, the BoE has to balance that with the need to get inflation down and given its persistence it may feel it has no choice but to act strongly now,” he added.
‘Forceful’ response promised
Speaking at the Mansion House Financial and Professional Services Dinner on 19 July, Bailey made clear he would act “forcefully” to bring inflation back to its 2% target.
He told the City: “If we see signs of greater persistence of inflation, and price and wage setting would be such signs, we will have to act forcefully. In simple terms, this means that a 50-basis point increase will be among the choices on the table when we next meet.”
The next MPC meeting is due to take place on 4 August.