Interest rate rise could be on the way as inflation soars

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They warn it could see the Bank of England raise the base rate – a move that could cause lenders to hike interest rates on things like personal loans and mortgages. The Office for National Statistics (ONS) said inflation rose from 1½ per cent in April.

It was significantly ahead of the expectations of analysts, who had forecast a 1.8 per cent rate for last month.

Last week, the Bank of England’s chief economist, Andy Haldane, said a rise in inflation above the central bank’s target must be only temporary, and that long-term levels of high inflation need to be “avoided at all costs”.

ONS chief economist Grant Fitzner said: “The rate of inflation rose again in May and is now above 2 per cent for the first time since the summer of 2019.

“This month’s rise was led by fuel prices, which fell this time last year but have jumped this year, thanks to rising crude prices.

“Clothing prices also added upward pressure as the amount of discounting fell in May.”

The ONS said higher transport and motor fuel costs were a major contributor to the jump in inflation, as crude oil prices increased amid pressures on supply.

It said motor fuels saw a 17.9 per cent price surge over the past year, representing the highest increase for more than four years.

Clothing prices also increased by 2.3 per cent, the biggest rise since 2018, as retailers significantly reduced their discounting a month after welcoming customers back into stores.

This inflation was only partly offset by a negative impact from cheaper food and drink prices.
Bread, cereals and meat prices all dipped after seeing significant rises a year earlier.

Jason Hollands, the managing director of online investment service Bestinvest said: “A period of higher inflation will squeeze many households, especially those that have been impacted by reductions in income as a result of furlough, unemployment or pay cuts.

“In other cases, however, the excess savings accumulated during the pandemic as people have stayed at home will help offset a financial squeeze in the near term.”

But Yael Selfin,the chief economist at KPMG UK, said interest rate rises are “unlikely”.

He said: “There is a greater level of uncertainty about prices at present, with a possibility that inflation will turn out to be higher if staff shortages persist, triggering stronger wage rises, while cost increases continue to be passed on to consumers.

”However, with price pressures expected to ease next year and inflation to stabilise around 2 per cent, it is likely that the Bank of England will hold fire and not raise interest rates before 2023.”

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