Borrowers have been put on notice for further Bank of England interest rate rises after inflation in the UK unexpectedly remained stuck at 8.7% in May, adding to the pressure on households suffering a surge in mortgage costs.
Figures from the Office for National Statistics (ONS) showed that annual inflation as measured by the consumer prices index was unchanged last month from the rate in April. City economists had forecast a figure of 8.4%.
In a shock report that underscored the challenge facing the central bank to curb the highest rates of inflation in decades, energy prices stabilising at record levels were offset by a sharp rise in the cost of air fares and package holidays as consumers rushed to book overseas summer travel.
Rising prices for secondhand cars, live music events and video games also contributed to inflation remaining high.
Financial markets reacted to the figures by betting that the Bank would increase rates on Thursday by at least a quarter-point from the current level of 4.5%, with a 50/50 chance of a tougher hike of half a percentage point to 5%. The central bank has already pushed through 12 consecutive rate hikes since December 2021, when borrowing costs had been set at a record low of 0.1% to support the economy through the Covid pandemic.
Core inflation – a measure that excludes volatile food, energy, alcohol and tobacco prices, and which is closely watched by the Bank – rose from 6.8% in April to 7.1% in May, the highest level since 1992.
The government is under growing pressure to intervene to help millions of households facing a “ticking timebomb” of higher mortgage payments before the general election.
Figures from the data provider Moneyfacts showed that the average interest rate on a two-year fixed residential mortgage rose to 6.15% on Wednesday, the highest level since Liz Truss’s disastrous mini-budget last autumn.
Underscoring the financial pain for millions of housheolds, the Institute for Fiscal Studies thinktank warned that almost 1.4m mortgage holders would see 20% of their disposable income erased by the surge in borrowing costs.
It said the heaviest blow would be reserved for those under the age of 40 with larger mortgages, and that households in London and the south-east of England, where property prices are typically higher than the national average, would be worst hit.
The latest inflation reading is likely to embarrass Rishi Sunak, who promised to halve inflation to about 5% before the end of this year. Concerns are growing about the persistence of the cost of living crisis as prices continue to rise at rates that are among the fastest in three decades.
The chancellor, Jeremy Hunt, said he recognised that inflation was hurting families and businesses across the country, but he dismissed calls for government intervention. “Our plan to halve the rate this year is the best way we can keep costs and interest rates down,” he said.
“We will not hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy, while also providing targeted support with the cost of living.”
Hunt said he had spoken to the consumer champion Martin Lewis ahead of a meeting with banks this Friday “to ensure banks are living up to the commitments” agreed in December to help mortgage borrowers struggling with payments and to discuss “what more they can do to help”.
The shadow chancellor, Rachel Reeves, said the government was failing to tackle inflation despite Sunak’s promise to halve it. “This Tory government can’t get a grip of this problem because they are the problem – 13 years of the Tories and their disastrous mini-budget are damaging our economic security and leaving families worse off,” she said.
According to the latest snapshot from the ONS, certain bigger musical acts playing at concert venues last month contributed to a sharp rise in the price of buying a gig ticket, drawing parallels with Beyoncé’s Stockholm concert last month being blamed for high Swedish inflation.
Economists said it was unlikely that the singer had caused the increase in Britain, because her tour came to London in late May, after the cut-off point for the ONS to gather price information. The statistics body declined to identify which acts had contributed to the rise in particular.
Falling petrol and diesel prices for motorists led to the largest downward contribution to inflation, while pressure from food and drink prices eased after they increased by less in May than in the same month a year earlier.
Prices remain high and are still rising fast, adding to pressure on struggling households. Although food and drink inflation slowed from 19% in April, it only dropped to 18.3%, still among the fastest rates in decades.
The figures highlighted the UK’s position as an international outlier with the highest inflation in the G7. The rate is more than three times the figure in the US and significantly higher than in several EU countries. There are growing speculation that high interest rates could tip the UK economy into recession as households suffering from a sharp rise in borrowing costs pull back on spending.
Karen Ward, the chief market strategist at the US bank JP Morgan, who is also an adviser to Hunt, told Radio 4’s Today programme that the Bank of England could be forced to engineer the conditions for a recession.
“The difficulty for the Bank of England – I mean, no one envies them their job at the moment – is, they have to therefore create a recession,” she said.