The Bank of England is expected to raise interest rates above 5% before the end of the year after the UK annual inflation rate fell by less than expected last month as food prices accelerated at the fastest pace for 45 years.
Property owners were warned last week that they face two possible further interest rate hikes this summer. Economists sounded the alarm that the Bank of England’s Monetary Policy Committee could be forced to hike rates from 4.5% in June, then possibly again within months, to get a firm grip on inflation.
They spoke out after inflation fell to 8.7% in April from 10.1% in March. While the drop below ten per cent was welcome, it was less than the City was expecting. Core inflation (which excludes energy, food, alcohol and tobacco) actually rose by 6.8% in the 12 months to April 2023, up from 6.2% in March, which is the highest rate since March 1992.
Raj Badiani, Principal Economist at S&P Global Market Intelligence, said, “rising service and core inflation in April suggests the Bank of England has little option but to continue its current tightening cycle. We now expect the policy rate to rise by 25 basis points to 4.75% at its next meeting on 22 June while acknowledging the rising probability of a further hike in early August.”
Paul Dales, Chief UK Economist at Capital Economics, added, “with inflation proving stickier than the Bank expected, it now seems all-but certain that the Bank will raise interest rates from 4.50% to 4.75% in June and perhaps a bit further in the months after.”
While Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, stressed, “a further increase in Bank Rate to 4.75% at the MPC’s next meeting on June 22, from 4.50%, now is firmly on the table, following April’s higher-than-anticipated rate of CPI inflation.”
Food and non-alcoholic beverage prices continued to rise in April, at an eye-watering rate of 19.1%, down only very slightly from 19.2% in March.
James Smith, research director at the Resolution Foundation think tank, said,: “the cost-of-living crisis is evolving not ending with surging food prices now taking centre stage. Surging food prices are particularly painful for low-income families, three-in-five of whom are already reporting that they are having to cut back on food and other essentials.”
The official figures came a day after the International Monetary Fund warned that interest rates in Britain would likely have to rise further from 4.5% and “remain high for longer” to get a firm grip on inflation. The IMF also cautioned against “premature celebrations” that sky-high inflation has been conquered and said it could “re-emerge or plateau at an elevated rate”.
However, it forecast that the UK would avoid a recession and see economic growth this year, of a miserly 0.4% but better than the 0.3% contraction predicted in April.
Chancellor Jeremy Hunt welcomed the “big upgrade” to the UK’s growth forecast which he said, “credits our action to restore stability and tame inflation”. But he was hit with grim public finance figures, and the economic pain faced by millions of families was laid bare by food inflation remaining eye-wateringly high.
Bank of England Governor Andrew Bailey told the Commons Treasury Committee that inflation was higher than it had expected but that it was now below the peak of 11%. Grocery prices over the four weeks to May 14 were 17.2% higher than a year ago, down from April’s 17.3%, said retail analysts Kantar.
It was a drop in the inflation rate for the second month in a row but the food price rises were still adding an extra £833 to the average consumer’s annual bill, according to latest figures. In the dairy aisle, the average cost of four pints of milk has come down by 8p since last month, but is still 30p higher than this time last year at £1.60.
Fraser McKevitt, head of retail and consumer insight at Kantar, said, “the drop in grocery price inflation..is without doubt welcome news for shoppers but it is still incredibly high - 17.2% is the third fastest rate of grocery inflation we’ve seen since 2008.”
Still feeling the pinch: Food prices fell by just 0.1 per cent down to 19.1 per cent in the 12 months to April 2023
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Shoppers skirting the higher prices sent sales of supermarket own-label items up by 15.2% this month, almost double the 8.3% rise seen for branded products. Despite the price pressures, consumers spent an extra £218 million on groceries during the week of the coronation, with sales of wine and quiche soaring.
Sales of sparkling and still wine climbed by 129% and 33% respectively. But UK food price inflation was the second highest in the G7 group of wealthy nations (US, UK, France, Italy, Canada, Japan, Italy and Germany), second only to the latter, according to the Office for National Statistics.
Mr Hunt met food manufacturers on Tuesday last week to ask them to do what they can to support consumers amid the skyrocketing food prices. The Chancellor also held talks with Competition and Markets Authority to discuss whether any failure in competition is leaving consumers paying higher grocery and fuel prices than they should be.
Meanwhile, Government borrowing soared to a near record £25.6 billion last month amid the cost of energy support schemes, higher benefit payments and rising debt interest, official figures revealed on Tuesday. The shock increase was to the second-highest April borrowing on record, only outstripped by the pandemic-impacted month in 2020, according to the Office for National Statistics.
Economists had predicted borrowing of £17.9 billion for April. The nation’s debt interest bill alone increased to nearly £10 billion last month.
Mr Hunt said, “debt and borrowing remain too high now - which is why it’s one of our priorities to get debt falling, we’ve taken difficult but necessary decisions to balance the nation’s books, and if we stick to our plan and get our economy growing, then debt is set to fall.”
The ONS said that central government receipts - the amount it receives from taxes and other payments - dipped by £2.7 billion to £69.7 billion compared with the same month last year. Meanwhile, spending jumped by £22 billion to £109 billion, partly due to a rise in social benefits, including the inflation-linked increase in benefit payments such as universal credit.
The Government also paid a further £2.2 billion in cost-of-living financial support over the month. Britain’s debt interest bill increased to £9.8 billion in April, the highest for the month since records began in 1993, due to increased interest on inflation-linked government bonds.
Liberal Democrat Treasury spokeswoman Sarah Olney said, "the latest borrowing figures “show the mess caused by the Conservative Government’s economic mismanagement. The British taxpayer is still feeling the hit from Liz Truss’s disastrous mini-budget. It is frankly shocking that the Government has still not put people first by putting a proper windfall tax in place and reversing its unfair tax cuts for the big banks.”
Meanwhile, growth in the UK’s private sector slowed last month, falling far short of expectations, the S&P Global/CIPS flash UK purchasing managers’ index has suggested. The closely-followed figure fell to 53.9% in May from 54.9% in April, according to the preliminary flash data. Although experts expected a much higher score of around 54.7%, the PMI figures still showed growth. April’s score had been a 12-month high.
Anything above 50 is considered to show the sector is growing.