6 months ago • 2 mins
What’s going on here?
UK inflation was out of tune with expectations for the fourth month in a row.
What does this mean?
Economists predicted inflation to drop to 8.4% in May, but it seems price increases ignored the memo last month, holding steady at 8.7% instead. That overshoot marks the fourth month on the trot that inflation has outpaced the pundits. And the main culprits? Used car prices, airline tickets, and the swelling cost of recreation and culture. That’s left Britain as an outlier among major economies, with consumer prices rising at a pace that’s more than four times the central bank’s 2% target. And it gets worse: core inflation, which excludes volatile food and energy prices, decided to join the fray, accelerating to a 30-year high of 7.1% – up from 6.8% the previous month. That left economists, who’d expected core inflation to sit pretty, with some serious egg on their faces.
Why should I care?
The bigger picture: Ticket to hike.
This spicy inflation data has got traders betting that the Bank of England will push interest rates to a peak of around 6% by early next year. But that strategy could be a double-edged sword, potentially causing the economy to stumble too. After all, a recent Bloomberg analysis suggests that pushing rates that high could cause the British economy to shrink by about 0.3% this year – and by a whole 1.4% in 2024.
Zooming out: The taxman.
A separate report dropped another bombshell on Wednesday: the UK’s government debt has climbed above the size of its economy for the first time since 1961, after public borrowing doubled in May. And with the economy potentially shrinking, that debt ratio could run further into the red. All that borrowing doesn’t just weigh on public finances: it’ll also tie the government’s hands, making it harder to cut taxes or rev up the economy with stimulus.
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