The Bank of England needs to raise interest rates even further, worsening the UK’s stagnation.
The United Kingdom released on Tuesday bleak inflationary data that increased fears in markets. Not only did consumer prices wildly miss expectations, but they also rose compared to April’s measurement.
UK inflation is at 8.7% year-on-year, while Reuters polled experts predicted an 8.4% measurement. Compared to April, inflation rose by 0.7% though it still remains lower than 2022 levels.
"Rising prices for air travel, recreational and cultural goods and services, and second-hand cars resulted in the largest upward contributions to the monthly change in both the CPIH and CPI annual rates." This was the analysis by the Office of National Statistics (ONS) about the grim inflationary data.
The UK’s fight against inflation is unique among other developed economies. British living costs far exceed those in G7 countries. In the European Union, inflation decreased to 6.1%, while in the United States it’s far lower at 4%.
Brexit is one of the main causes of such high inflation. The violent seizure between the European and British markets disrupted logistic lines and supplies.
Though the British economy is holding better than Germany’s, it still suffered the effects of the energy crisis. British GDP is stagnating and the country is predicted to fall into recession by the end of the year.
Straightforward monetary policy
Given the abysmal inflationary data in May, the Bank of England has its hands tied.
Interest rates must keep growing even though they have risen to 4.5% in 13 months of consecutive hikes. The same strategy has been pursued by the European Central Bank and the Federal Reserve.
In both of these cases, however, rate increases have caused inflation to fall. In the United Kingdom, they don’t seem to work as well.
In particular, core inflation keeps rising. This value measures consumer prices of the more "stable" markets, like housing. In the UK, core inflation rose to 7.1%, a 31-year high.
Therefore, the Bank of England will keep raising interest rates, further pushing the economy into crisis.
Short-term mortgages, the most popular among British homeowners, will be hit the most. "It’s a ticking time bomb as 1.4 million borrowers will see an end to their low fixed rates this year," said Strive Mortgages director Jamie Elvin.
Fixed rates before Covid were extremely convenient for homeowners, though they are due to expire in the coming months. Then, higher interest rates will kick in, meaning financial dread for most mortgage holders.
An unsolvable situation that signals dark times ahead for the UK, along with the rest of Europe.
