More woe for Rachel Reeves as ‘sticky’ inflation defies expectations to hold at 3.4% – with BoE poised to shun interest rate cut pleas tomorrow
UK inflation defied expectations of a fall today as Rachel Reeves‘ hopes for the economy suffered another blow.
Official figures showed headline CPI stuck at 3.4 per cent in May, worse than the 3.3 per cent analysts had pencilled in.
Rising food prices offset easing air fares and transport costs, dashing hopes that Brits would get some respite after ‘Awful April’ bill hikes pushed prices up at their highest pace for a year.
Economists said the ‘dismal’ numbers meant the Bank of England is almost certain to hold off cutting interest rate cuts when the Monetary Policy Committee meets tomorrow. Ministers have been looking to Threadneedle Street to help kick-start UK plc’s stalling activity.
There is also a looming threat from carnage in the Middle East, with concerns the Israel-Iran conflict could cause a devastating spike in energy costs.
Ms Reeves admitted there was ‘more to do’ to tackle the cost of living, insisting her ‘number one mission is to put more money in the pockets of working people’.
The ONS recorded April’s annual inflation rate at 3.5 per cent but later disclosed an error in vehicle tax data, saying the level should have been 3.4 per cent.
Ms Reeves said: ‘We took the necessary choices to stabilise the public finances and get inflation under control after the double digit increases we saw under the previous government, but we know there’s more to do.
‘Last week we extended the £3 bus fare cap, funded free school meals for over half a million more children and are delivering our plans for free breakfast clubs for every child in the country.
‘This Government is investing in Britain’s renewal to make working people better off.’
But shadow chancellor Sir Mel Stride said: ‘This morning’s news that inflation remains well above the 2 per cent target is deeply worrying for families.
‘Labour’s choices to tax jobs and ramp up borrowing are killing growth and stoking inflation – making everyday essentials more expensive.’
ONS acting chief economist Richard Heys said: ‘A variety of counteracting price movements meant inflation was little changed in May.
‘Air fares fell this month, compared with a large rise at the same time last year, as the timing of Easter and school holidays affected pricing. Meanwhile, motor fuel costs also saw a drop.
‘These were partially offset by rising food prices, particularly items such as chocolates and meat products. The cost of furniture and household goods, including fridge freezers and vacuum cleaners, also increased.’
In a small bright spot, core CPI inflation – excluding energy, food, alcohol and tobacco – was going up by 3.5 per cent in the 12 months to May, lower than the 3.8 per cent the previous month.
The annual CPI goods rate rose from 1.7 per cent to 2 per cent, while services slowed from 5.4 per cent to 4.7 per cent.
Chancellor Rachel Reeves is pictured on Monday during a visit to Gateshead, Tyne and Wear
The figures mean prices were still rising in May at a similar rate to April when a raft of bills increased for households up and down the country.
The energy price cap, set by regulator Ofgem, rose by 6.4 per cent in April, resulting in bills for a typical household rising by £9.25 a month.
Steep increases to water charges, and rises for council tax, mobile and broadband tariffs , and TV licences were among those to take effect.
Meanwhile, oil prices have been rising in recent days since Israel launched an attack on Iran’s nuclear programme, raising concerns that the supply of crude from the Middle East could be disrupted.
Rising oil prices could threaten to push up inflation in the UK. Energy costs coming down has been one of the biggest contributors to overall inflation falling from the peaks hit during the cost-of-living crisis.
Suren Thiru, Economics Director at ICAEW, said: ‘May’s dismally modest drop is unlikely to quell concerns over inflation, as it owed more to the unwinding of distortions caused by Easter falling in April this year, particularly on services prices, than a telling reduction in cost pressures.
‘UK inflation is facing a turbulent summer with the fallout from ‘awful April’ and growing global volatility likely to lift it moderately higher from here, despite lower energy bills from July and a weaker economy.
‘The current geopolitical instability is a double-edged sword for inflation because while it may mean a protracted period of higher fuel costs, it could also accelerate the downward pressure on pricing as demand falls in response to these headwinds.
‘An interest rate cut on Thursday looks implausible as rate setters will probably want to hold off until August to get a better understanding of the impact of this global uncertainty before taking the plunge once again.’
