Rate rise alert after inflation hits new peak

CONSUMER price index inflation hit a record high of 9.2 per cent last month, official data is expected to confirm on Wednesday, tightening the squeeze on household finances.

Economists warn that if inflation for May comes in higher than expected, it could force the Bank of England’s Monetary Policy Committee (MPC) to raise its base rate by 50 basis points to 1.75 per cent at its next meeting in August. On Thursday the MPC raised rates by a quarter point to 1.25 per cent.

The Office for National

Statistics is tipped to say CPI inflation edged up from 9 per cent to 9.2 per cent last month, the highest level since records began in the late 1980s.

However, Capital Economics’ senior UK economist Ruth Gregory said there is a chance it could be even higher, which would put the MPC under increased pressure to hike rates and tame soaring inflation.

“Worries over the weakening in the real economy may have explained the smaller size of the

UK rate rise last week. But this doesn’t necessarily mean rates won’t rise by 50 basis points at the MPC’S meeting in August, or in subsequent months,” she said.

“After the huge leap in April, a rise in CPI inflation from 9 to 9.2 per cent in May would feel more pedestrian. But the strengthening in inflation in the US in May means there is every chance that inflation rose more sharply in the UK too.”

Thomas Pugh, economist at RSM, said that with the MPC stating in its minutes that it is “alert to indications of more persistent inflationary pressures” and that it is prepared to act “forcefully” in response”, there is a risk of further rate rises.

“This is the MPC flagging that it is open to bigger or faster rises in interest rates if inflation turns out to be worse than it expects. This is a big shift from May when two members declined to sign up to guidance that more hikes were needed,” he said.