UK Inflation Surges, Putting Pressure on Bank of England: Rate Hike Expectations Rise

UK inflation shock piles pressure on the Bank of England

The bar is set pretty high for the Bank of England to accelerate the pace of rate hikes to 50 basis points this week. But another inflation shocker all but guarantees a 25bp hike tomorrow and another in August.

 

It’s another month where UK inflation has come in dramatically higher than expected, and that all but guarantees another rate hike from the Bank of England tomorrow. Headline inflation remained unchanged at 8.7% in May, and because the contribution from energy and food reduced, that means core inflation actually rose to 7.1% from 6.8% previously.

Unfortunately, things look just as concerning when you look into the figures in more detail. The Bank of England is most focused on services inflation because it tends to exhibit more persistent and less volatile trends. And here we saw a further increase in the annual rate of inflation, and that means the contribution from services to overall headline CPI is about 0.3pp higher than the BoE had previously been forecasting. Crucially, this upside surprise doesn’t appear to be concentrated in any single category.

 

How May's inflation data compare to the BoE's forecast

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