Mortgage holders - look away from today's troubling inflation figures

Inflation rates have not fallen, which means inflation will go up again, ITV News Political Business and Economics Editor Joel Hills report

Inflation in Britain continues to defy the consensus and in ways that are deeply troubling.

The annual headline rate last month remained lodged at 8.7%, the Bank of England had forecast it would fall to 8.3%.

Meanwhile “core” inflation - which excludes food and energy prices - rose to 7.1% and “services” inflation accelerated to 7.4% - the highest level since 1992.

On every key measure, the arrows are pointing in the wrong direction.

In May, an unexpected jump in air fares and rises in the prices of second-hand cars, live events and computer games offset a decline in energy prices and a significant fall in the pump price of petrol and diesel.

Food inflation eased slightly and there are signs it may have peaked, although prices last month were still 18.3% higher than a year earlier.

“Millions of families on low incomes are going hungry, unable to afford regular, healthy meals,” said the Joseph Rowntree Foundation.

The Bank of England’s great anxiety is that inflation, which was initially propelled higher on the back of food and energy bills, is now being domestically driven.

There’s plenty of evidence here of “second round effects” - economist-speak for an upward spiral of wages and prices.

For the last eighteen months, the Bank of England has been raising interest rates to bring down prices.

Last week, a former MPC member, Sushil Wadhwani compared this tightening cycle to “drug therapy” to purge the economy of high inflation.

As we have seen, the medicine is taking time to work and is having unpleasant side effects.

A cost of living squeeze is now being amplified by a cost of borrowing squeeze.

Joel Hills analyses what has happened to interest rates and why they keep climbing

800,000 mortgages are due to be refinanced in the second half of this year, 1.6 million in 2024. In almost every case these households will find themselves worse off.

The latest inflation numbers are so disturbing that markets now think the Bank of England is more likely to hike interest rates by 0.5% tomorrow instead of 0.25%.

The expectation is that Bank Rate will need to hit 6% early in 2024 in order to weaken the economy sufficiently to tame inflation.

Happier endings are possible. Pantheon Economics doesn’t think interest rates will have to rise as high as investors expect and that inflation is set to fall sharply.

It points out that the average annual utility bill in the UK will fall to £2,074 in July (from £2,500), that “producer output prices” (what manufacturers charge for the goods they make) have tumbled in recent months and that the latest surveys suggest wage growth may be slowing.

“Our plan to halve the rate [of inflation] this year is the best way we can keep costs and interest rates down,” said the Chancellor, Jeremy Hunt, this morning.

Many advanced economies have had problems with inflation. The chancellor will be aware that Britain’s case is starting to look particularly bad.

“Core” inflation in the United States and the Eurozone is elevated but at least it’s moving south.

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