Why Inflation Rose More Than Expected in June

The cost of living surged last month as the rising prices of everyday products such as butter, beef, and e-books drove an unexpected increase in inflation. Prices for these items rose sharply in June, with butter and beef both up by 20 per cent year-on-year, while e-books saw a staggering 31.8 per cent increase.

The Office for National Statistics (ONS) reported a rise in the Consumer Prices Index (CPI) to 3.6 per cent in June, compared with 3.4 per cent the previous month. Analysts had widely anticipated inflation to remain stable, making June’s uptick a surprise to many in the financial sector. The Bank of England had also forecast inflation to hold, but the data indicates otherwise.

A number of factors contributed to this surge in prices. Payroll taxes increased by £25 billion in April, coinciding with a 6.7 per cent rise in the minimum wage. Energy costs have also spiked, while food prices rose at their quickest rate in more than a year. Domestic pricing pressures remain evident, with services inflation measured at 4.7 per cent, just above the Bank of England’s expectations. Meanwhile, core inflation, stripping out volatile food and energy prices, climbed to 3.7 per cent from 3.5 per cent.

This prolonged period of high inflation is likely to persist, with projections suggesting a rate of over 3 per cent for the rest of the year. It remains well above the 2 per cent target set by the Bank of England, posing challenges for policymakers as they consider next steps in managing the economy.

Signs of economic weakness are beginning to emerge, strengthening the argument for a potential interest rate cut. Over April and May, the economy shrank by 0.3 per cent and 0.1 per cent respectively. The decline in the number of payrolled employees, which dropped by over 109,000 in May, marks the steepest fall since the initial stages of the Covid-19 pandemic.

The Bank of England is now faced with a difficult decision as it approaches its next meeting on 7 August. It must choose between maintaining interest rates at 4.25 per cent to continue tackling inflation or easing monetary policy with a rate cut to avert a deeper economic downturn. Any move may hinge on the latest labour market figures set to be released by the ONS, with markets favouring a quarter-point rate cut next month as a likely outcome.

Andrew Bailey, the Governor of the Bank of England, recently indicated his willingness to adjust rates more swiftly if unemployment levels rise significantly. For households and policymakers alike, the inflation challenge remains a critical concern, and all eyes will be on how the central bank responds in the coming weeks.