The U.K.’s Cost-of-Living Crisis Inflation Has Reached a New 40-Year High

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  • The consumer price index increased by 9.3% on an annual basis, consistent with a forecast among economists and a slightly greater increase than the 9.1% in May.
  • In order to rein in inflation, Bank of England Governor Andrew Bailey said policymakers may consider a 50 basis point hike at its August meeting.

LONDON — Food and energy prices continue to soar, escalating the U.K.’s historic cost-of-living crisis. Inflation hit a new 40-year high in June as well.

Consumer prices, according to a new report out this week, increased 9.4% over the past year and are now 9.4% higher than they were in May 9.1%

The 0.8% rise in consumer prices in May exceeded the 0.7% rise in April, but fell short of the 2.5% increase in April.

In its report, the Office for National Statistics revealed that its consumer price index model forecasts that the UK’s consumer price index could last have been as high as 1982 when they estimate the current rate to be between nearly 11% in January and approximately 6.5% in December.

ONS said motor fuels and food contributed most to rising inflation rates, with the former rising 42.3% on the year, the highest rate since before the historical series was constructed in 1989.

50 basis point hike?

As the Bank of England implements five consecutive 25 basis point hikes to interest rates, Governor Andrew Bailey at a speech on Tuesday suggested the Monetary Policy Committee might consider a 50 basis point hike in the near future.

This would be the biggest single increase in interest rates in the United Kingdom since nearly 30 years, and Bailey reiterated the Bank’s commitment to bring inflation back to its 2% target. Several Conservative Party candidates have criticized the governor publicly, hoping to replace Boris Johnson as prime minister.

“From the perspective of monetary policy, these times are the largest challenge to the monetary policy regime of inflation targeting that we have seen in the quarter century since the MPC was created in 1997,” Bailey said.

U.S. and Europe heat waves: The economy takes a hit when it’s unusually hot, says professor
Credit:CNBC International TV

“That emphatically does not mean the regime has failed. Far from it. The regime was set up for times exactly like these. The regime, founded on central bank independence, is now more important than ever. The worth of any regime is tested in the difficult, not the nice, times.” Bank of England Statement

The Bank expects inflation to reach 11% later in the year, according to its forecasts, while recent ONS figures showed that pay raises have failed to keep up with inflation, plunging to their lowest levels since records began in 2001.

“The intense cost of living squeeze is putting significant pressure on the UK’s consumer-led economy and means the risk of recession is high,” said Hussain Mehdi, macro and investment strategist at HSBC Asset Management.

“Despite this, the Bank of England is likely to remain ultra-hawkish as it tries to combat a wage-price spiral that has been developing amid a still-hot labor market contributing to domestic inflationary pressures.”

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