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Inflation in the UK is proving stubborn

Central Banks are struggling to catch-up with inflation

UK inflation rate remains high at 8.7% in May 2023

The UK inflation rate remained at 8.7% in the year to May 2023, according to the latest official figures from the Office for National Statistics (ONS). This is the same rate that was recorded in April, but down from the 10.1% level seen in March.

The ONS said that rising prices for air travel, recreational and cultural goods and services, and second-hand cars resulted in the largest upward contributions to the annual inflation rate. However, these were offset by falling prices for motor fuel and food and non-alcoholic beverages.

The ONS also reported that core inflation, which excludes energy, food, alcohol and tobacco, rose to 7.1% in May, up from 6.8% in April, and the highest rate since March 1992.

‘I’m just taking this calculator thingy to my boss, I thought it might help’. ‘Well, good idea, guess it can’t make it any worse’.

High inflation is the fault of everyone else other than the central bank

The inflation rate is measured by the Consumer Prices Index (CPI), which tracks the changes in the cost of a basket of goods and services that are typically purchased by households. The CPIH, which includes owner occupiers’ housing costs, rose by 7.9% in the year to May, up from 7.8% in April.

The high inflation rate has been driven by a combination of factors, including supply chain disruptions, labour shortages, higher energy costs, and strong consumer demand as the economy recovers from the coronavirus pandemic.

The Bank of England has a target to keep inflation at 2%, but it has said that it expects inflation to rise further in the coming months before falling back next year. The Bank has also signalled that it may raise interest rates sooner than expected to curb inflationary pressures.

However, June’s inflation reading came in below economists expectations at 7.3% A small but welcome reversal of high UK inflation. UK inflation is higher than the EU and U.S.

Are central banks doing a good job at controlling inflation? Bear in mind the inflation target is 2%…

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Oh no, not again!

UK Interest rate 5% and rising

The current interest rate in the UK is 5% as of June 2023.

This is the Bank Rate set by the Bank of England (BoE), which influences the interest rates that other banks charge borrowers and pay savers. The BoE has raised the Bank Rate 13 times in a row from 0.1% to 5% in a bid to control inflation, which is the rate at which the prices of goods and services increase over time. The BoE has a target of keeping inflation at 2%, but the current inflation rate is 8.7%, which is much higher than the target. This means that the purchasing power of money is decreasing and people have to pay more for the same things.

Summary

  • The Bank of England has increased the base rate to 5% – up from 4.5% in June 2023
  • It’s a bigger increase than most forecasters expected
  • The last time the base rate was 5% or higher was in 2008
  • Higher interest rates are intended to lower inflation, by giving mortgage-holders and consumers less to spend
  • The government’s target is to have inflation down to 5% by the end of the year
  • Rishi Sunak said: ‘I always said this would be hard – and clearly it’s got harder over the past few months’ – I am totally, 100%, on it, and it’s going to be OK‘
  • Seven of the nine members of the bank’s committee voted for the 5% rate – two wanted no change at all

Bank of England mission statement

Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability.

Meet our new policy adviser

Well, the BoE has clearly done a good job here then with the UK interest rate now at 5%, again… and inflation at 8.7% after peaking at 11.1% in November 2022, a 41 year high! Great job!

And the UK PM said, ‘I always said this would be hard – and clearly it’s got harder over the past few months. I am totally, 100%, on it, and it’s going to be OK‘.

That’s good to know then – it’s going to be OK – so reassuring for borrowers! It’s going to be OK, so don’t worry!

Sorry PM, but that is so weak it’s bordering pathetic. Weren’t you the chancellor too?