According to official estimates, rising gas and food costs last month brought British inflation to its highest level in 40 years, increasing the likelihood of a rare half-point interest rate rise by the Bank of England next month.

Annual consumer price inflation climbed to 9.4 percent in June, the most since February 1982, according to the Office for National Statistics, up from 9.1 percent in May and above the 9.3 percent consensus in a Reuters survey of experts.

With the latest rise, Britain now has the highest rate of inflation of any Group of Seven advanced economy since 1985, while several smaller European Union nations are now seeing even greater price increases.

The statistics released on Wednesday increased expectations that the Bank of England would raise interest rates by 50 basis points next month, the largest increase since 1995. According to Reuters, the European Central Bank is mulling such a step this week. 

On Tuesday, Bank of England Governor Andrew Bailey said that a hike in borrowing rates was on the table but not “locked in”.

The Bank of England has increased interest rates five times since December in an attempt to prevent a jump in inflation from becoming lodged in the British economy, and it is set to do so again on August 4.

“Soaring inflation means that momentum for a half-point interest rate rise in August is growing,” said Suren Thiru, economics director at the accountancy trade organization ICAEW.

“However, tightening monetary policy too aggressively increases the risk of recession and will do little to address the global factors driving this inflationary surge.”

Investors now believe the Bank of England will raise the Bank Rate to 1.75 percent from 1.25 percent next month. In June, it said that it was prepared to act “forcefully” if necessary.

The ONS said that core inflation in June decreased to 5.8 percent from 5.9 percent in May, in line with the Reuters poll median expectation, which should soothe Bank of England policymakers who are hesitant to raise interest rates more rapidly.

The ONS cited a 42 percent year-on-year increase in gas costs and an almost 10% increase in food prices as the primary drivers of inflation last month, a hammer blow for low-income people.

According to the Resolution Foundation research tank, inflation for this category has already reached double digits.

The cost-of-living crisis has sparked a wave of trade union strike action and has sparked heated discussion among the three remaining contenders in the contest to succeed Boris Johnson as Prime Minister.

Two are pledging quick tax cuts, which the other candidate, former finance minister Rishi Sunak, believes would drive inflation.

The data released on Wednesday indicated that further inflationary pressures were on the way.

Prices paid by manufacturers for materials and energy – a crucial indicator of prices ultimately paid by consumers in stores – were 24.0 percent higher in June than a year earlier, according to the ONS, the largest rise since records started in 1985.

Factory prices increased by 16.5 percent, the biggest since September 1977.

In reaction to the findings, finance minister Nadhim Zahawi said that Britain was not alone in experiencing runaway inflation and that the government was collaborating with the Bank of England to address the issue.

Source: Reuters

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