UK Inflation Data Shows Historic Surge to 40-Year High at 9.4%

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The Bank of England is considering a 50 basis points rate hike next month which would be the single biggest increase in over 30 years.

The United Kingdom announced its inflation data for June 2020 which stands at a 40-year-high and a staggering 9.4%. The inflation in the UK peaks with food and energy prices continuing to soar putting major pressure on the country’s cost of living.

The consumer price index rose by 9.4% on an annual basis, higher than the May reading of 9.1%. There was a 0.8% monthly jump in consumer prices while exceeding the previous month’s 0.7% rise.

Earlier today, July 20, UK’s Office for National Statistics said that its indicative modeled CPI estimates suggest that the CPI rate would last have been higher around 1982, where estimates range from nearly 11% in January down to approximately 6.5% in December.”

ONS further noted that food and motor fuels were the most significant contributors to the rising inflation. The motor fuel prices have soared by 42.3% in the year. Furthermore, the ONS figures showed that the real wages ending the month of May, witnessed the steepest declines since 2001. Hussain Mehdi, macro and investment strategist at HSBC Asset Management, told CNBC:

“The intense cost of living squeeze is putting significant pressure on the UK’s consumer-led economy and means the risk of recession is high. Nevertheless, the Bank of England is likely to remain in uber-hawkish mode as it attempts to counter the risk of a wage-price spiral developing with recent data suggesting a still hot labor market that is contributing to domestic inflationary pressures.”

BoE Interest Rate Hikes

So far, the Bank of England (BoE) has already announced five consecutive rate hikes of 25 basis points each. But with the recent inflation reading, the central bank of the UK is likely to get more aggressive. While speaking at the Mansion House Financial and Professional Services Dinner yesterday, BoE governor Anrew Bailey suggested that they could consider a 50 basis rate hike during the August policy meeting.

This would be the biggest increase by the British central bank in over 30 years. Bailey said that there would be no compromises in the bank’s commitment to bring inflation under 2%. The BoE governor added:

“From the perspective of monetary policy, these times are the largest challenge to the monetary policy regime of inflation targeting that we have seen in the quarter century since the MPC was created in 1997. That emphatically does not mean the regime has failed. Far from it. The regime was set up for times exactly like these. The regime, founded on central bank independence, is now more important than ever. The worth of any regime is tested in the difficult, not the nice, times”.

The Bank of England is expecting inflation to peak at 11% later this year.

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Bhushan Akolkar

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