Background: A tight labor market is fueling inflationary pressures.
Achieving the government’s pledge will not solve Britain’s inflation problem. The central bank is mandated to ensure price stability, which is measured as 2 percent inflation.
Like its neighbors in Europe, inflation in Britain has been boosted by soaring fuel prices in the past year. But as wholesale prices have fallen this year, the benefit has been slow to trickle down to British households, as fuel price caps are set quarterly by government regulators.
This partly explains Britain’s relatively high inflation rate – it is higher than in Western Europe and double the rate in the United States – but there are other reasons why inflationary pressures are strong in Britain.
Britain still has more people out of the workforce than before the pandemic, unemployment is down and job openings are up. Employers are raising wages to attract and retain workers. Although these higher wage increases may not keep pace with inflation, wage growth becomes a stubborn source of higher prices as companies pass on higher labor costs.
Private sector wages rose 7.1 percent in the three months to May from a year earlier, a record high outside of the pandemic when furlough data is skewed.
What’s next: The central bank is expected to raise rates further.
Despite lower-than-expected inflation, the Bank of England is expected to raise interest rates when policymakers meet in early August.
The “encouraging” data comes with a caveat, according to economists at Barclays. There has been limited progress on services inflation, indicating some persistence in inflation, along with private sector wage growth. Together, this warrants more monetary tightening, they wrote in an analyst note.
Economists still expect the central bank to raise rates by half next month, but said the chances of a smaller quarter-point increase have grown.
The central bank has raised interest rates in 13 consecutive meetings, from 0.1 percent at the end of 2021 to 5 percent last month.
Investors on Wednesday tempered their expectations for future rate hikes. In the past, he had bet that interest rates would stay above 6 percent, but now markets are indicating that rates will rise to around 5.8 percent by the end of the year.
Any fall in rate expectations would be good news for mortgage holders, who have to renew the terms on their fixed-rate loans and face increases in their monthly payments of hundreds of pounds.
