UK government borrowing costs rose at the fastest pace in Europe today, after a fresh set of data showed that the rate of inflation unexpectedly jumped last month to the highest level in over a year.
Yields on ten-year gilts rose to 4.67 per cent this morning in the wake of the latest ONS figures that defied economists’ expectations that inflation would remain unchanged. Instead, it rose to 3.6% in the year to June, up from 3.4% in May. Meaning Britain is now contending with the highest rate of inflation in the G7.
This is well above the Bank of England’s 2 per cent target, casting uncertainty on whether, when the Bank’s Monetary Policy Committee meets next month, it will press ahead with another rate cut which would have made borrowing that bit cheaper.
Much of June’s rise was driven by the cost of motor fuel, according to the ONS, while food inflation - which rose to the highest level in over a year - also contributed.
Worryingly, core inflation - which strips out volatile food and energy prices and is generally considered a more accurate measure of underlying trends - also jumped to 3.7 per cent, from 3.5 per cent in May.
And the annual RPI inflation rate was 4.4% in the year to June, a rise from 4.3% in May.
Analysts say that the Chancellor’s decision to impose a £25 billion tax rise on employers in her maiden Budget has likely contributed to this lousy set of data: a rise in the cost of restaurant meals, hotels and the price of supermarket groceries provide early signs that businesses are passing on their higher employment costs to consumers.
Higher-than-expected inflation piles further pressure on Rachel Reeves, who is already under intense scrutiny following two consecutive months of negative growth, and mounting speculation about another set of tax rises in the Autumn Budget that could further hinder growth.
Last night, Reeves attempted to shrug off Britain’s anaemic growth performance in her much-hyped Mansion House speech. She promised City bankers she would reinvigorate the economy by cutting red tape that acts as the “boot on the neck of business”. And she called for a new era of “shareholder democracy” to encourage all Brits to invest.
It was a speech attempting to reset the economic narrative.
Unfortunately, this attempt at optimism has been overshadowed today by renewed fears that the UK economy is entering stagflation: that highly undesirable combination of rising inflation and stagnant growth.
Stagflation leaves the Bank of England walking a difficult tightrope. When it comes to rate cuts, ONS unemployment data set to be published tomorrow will give us a better indication of the BoE’s next move. If the jobs market has been weakened in the face of of a £25 billion rise in payroll taxes and sluggish economic growth, then the Bank is more likely to press ahead with another rate cut next month, in spite of this inflationary spike.
Caitlin Allen
Deputy Editor
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