Inflation shoots up further: City responds to consumer price index hitting record 9.1 per cent

The rate of inflation rose again in May, remaining at 40-year highs, the Office for National Statistics said this morning.

The rate of Consumer Prices Index inflation rose slightly to 9.1 per cent in May from 9 per cent in April, according to the ONS.

The increase matches what analysts had expected.

“Though still at historically high levels, the annual inflation rate was little changed in May,” said ONS chief economist Grant Fitzner.

“Continued steep food price rises and record high petrol prices were offset by clothing costs rising by less than this time last year, and a drop in often fluctuating computer games prices.”

ONS chief economist Grant Fitzner

“The price of goods leaving factories rose at their fastest rate in 45 years, driven by widespread food price rises, while the cost of raw materials leapt at their fastest rate on record.”

In response, Chancellor of the Exchequer, Rishi Sunak said this morning: “I know that people are worried about the rising cost of living, which is why we have taken targeted action to help families, getting £1,200 to the eight million most vulnerable households.

“We are using all the tools at our disposal to bring inflation down and combat rising prices – we can build a stronger economy through independent monetary policy, responsible fiscal policy which doesn’t add to inflationary pressures, and by boosting our long-term productivity and growth.”

In response to the news, several Square Mile insiders discussed with City A.M. what this means businesses, investors and ordinary Brits.

“There are no signs yet of inflation receding,” sighed Yael Selfin, Chief Economist at KPMG UK, this morning.    

“Inflation continues to rise, primarily driven by external factors, with price rises spread widely across the economy,” Selfin noted.

He added that “rising inflation is putting further pressure on policymakers to ease the burden on households, while complicating the Bank of England’s task. As the economy enters a period of weaker growth, a more aggressive increase in interest rates could see the Bank of England undershoot its target in the medium term.”

Household finances

“A further spike in inflation was expected – but this will offer little comfort to struggling households, particularly as wages aren’t keeping up,” said Connor Campbell at NerdWallet said.
 
“Clearly, the government must go beyond one-off financial support and develop a long-term economic recovery plan to help the UK emerge from its current economic predicament. Not all households, however, can afford to wait for such measures to be announced,” Campbell added.
 
He added: “There is no quick fix to the cost-of-living crisis. However, Britons should know that  there are tools available to provide some short-term relief. And such action could set them on the right track towards regaining some control over their finances.”

Investors

Jatin Ondhia, CEO of FCA-regulated investment platform Shojin, told City A.M. this morning: “Prices are rising faster than they have for four decades and while May’s CPI figures represent little change from last month’s record hike, the tide remains strong and is set to continue rising, which could push inflation into double figures towards the end of the year.”

Ondhia noted that “the combination of sustained and high inflationary pressure with sharp rate rises and generally tighter monetary policy constitutes a radically different macroeconomic environment, posing a serious threat to investment returns and consumers’ finances.”

As the global economic outlook darkens, investors must take the time to reassess their inflation toolbox and consider which assets are likely to help cushion their portfolios against further hikes, he added.

International markets

Giles Coghlan, Chief Analyst, HYCM said: “If today’s CPI print tells us one thing, it is that the UK’s economic outlook looks very bleak indeed. With forecasts suggesting that GDP will head into negative territory for 2023, the Bank of England has an impossible task on its hands.”

“Ultimately, policymakers have very little choice other than to hike interest rates to bring down inflation.”

Giles Coghlan, Chief Analyst, HYCM

Coghlan thinks that “without adequate quantitative tightening, the Monetary Policy Committee risks inflation spiralling wildly out of control and causing a wage-price spiral, which would be disastrous for the economy.

“As today’s inflation data came in just a fraction below the market’s maximum expectations of 9.3 per cent year-on-year, traders and investors should therefore watch for yet more aggressive action from the Monetary Policy Committee in August,” he continued.

Predictions are currently suggesting that inflation could top 11 per cent this year – this, combined with the Ofgem cap rise due in October, means that the risk of a recession is looking more and more probable by the moment.

“Before the release of the inflation print, the short-term interest rate (STIR) markets were pricing in a 86% chance of a 50bps rate hike for the central bank’s August 04 meeting, so investors will no doubt be awaiting a hawkish response from the BoE,” Coghlan said.

Retailers

Discussing the latest inflation figures, Mohsin Rashid, co-founder of ZIPZERO, said: “Consumers are being battered on all sides. If you delve beyond today’s data about the eyewatering rate of inflation, the figures make for ugly reading: annual spending on food is expected to rise £380 this year, while energy bills are on track to pass £3,000 for the first time ever.”

Rashid stressed that “savvy financial management is important, yes. But to think consumers can work their way through such a challenging economic climate on their own is foolish. Businesses must do more – namely, retailers and energy providers.”

He added: “Positively, there’s a solution. Each year, retailers and brands spend a whopping £27bn on digital marketing. This money could be redirected back to consumers in the form of cash rewards from their everyday shopping, helping them to pay their spiralling energy bills.”

“This can only work if retailers and energy providers operate together on the same platform. Retailers can engage directly with shoppers, offering cash rewards from purchases; these cash rewards can then be used by shoppers to pay their energy bills.”