UK inflation slows to 7.9 per cent

[ad_1]

BACKGROUND: A tightening labor market is fueling inflationary pressures.

Fulfilling the government’s pledge will not solve Britain’s inflation problem. The central bank has a mandate to ensure price stability, which is measured as 2 percent inflation.

As in its European neighbours, inflation in Britain rose due to higher energy prices last year. But with wholesale prices lower this year, the benefit has been slow to reach British households, in part because caps on energy prices are set every three months by a government regulator.

This partly explains Britain’s relatively high inflation rate – it is higher than in Western Europe and double the rate in the United States – but there are other reasons why inflationary pressures in Britain are so strong.

There are still more people outside the labor force in Britain than before the pandemic, unemployment is low and vacancies are high. Employers pay wages to attract and retain workers. Although most of these wage increases do not keep pace with inflation, wage growth risks becoming a stubborn source of price increases as firms pass on higher labor costs.

Wages in the private sector rose 7.1 percent in the three months through May from a year earlier, a record outside the pandemic, when furloughs distorted the data.

What’s next: The central bank is still expected to raise interest rates.

Despite the lower-than-expected inflation reading, the Bank of England is expected to raise interest rates when policymakers meet in early August.

That’s because the “encouraging” data comes with a caveat, according to economists at Barclays. There has been limited progress on service inflation, which, along with private sector wage growth, suggests some persistence of inflation. Together, they wrote in an analytical note, this calls for more monetary tightening.

Economists still expect the central bank to raise interest rates by half a percentage point next month, but said the chances of a quarter-point increase have increased.

The central bank raised interest rates in 13 consecutive meetings to 5 percent last month from 0.1 percent in late 2021.

Investors tempered their expectations on interest rate hikes on Wednesday. Previously, they were betting that interest rates would peak above 6 percent, but now the markets are suggesting that rates will rise to around 5.8 percent by the end of the year.

Any dip in interest rate expectations would be good news for mortgage holders, who need to renew the terms of their fixed-interest loans and face hundreds of pounds in their monthly payments.

[ad_2]