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Sticky May inflation means damaging interest rate rise inevitable

Author: ICAEW Insights

Published: 21 Jun 2023

Official data reveals that UK inflation remained unchanged in May, with rising costs in air travel, goods, and services offsetting falls elsewhere.

The inflation figures released on Wednesday 21 June 2023 by the Office for National Statistics (ONS) reported that the Consumer Prices Index (CPI) rose by 8.7% in the 12 months to May 2023, unchanged from April. On a monthly basis, UK CPI inflation rose by 0.7% in May, unchanged from May 2022. 

Rising prices for air travel, recreational and cultural goods and services, and second-hand cars resulted in the largest upward contributions to the headline rate. Core CPI (excluding energy, food, alcohol and tobacco) rose by 7.1% in the 12 months to May, up from 6.8% in April, and the highest rate since March 1992. The CPI goods annual rate eased from 10.0% to 9.7%, while the CPI services inflation rose from 6.9% to 7.4%.

Prices for recreational and cultural goods and services rose, overall, by 6.8% in the year to May, up from 6.4% in April, and the highest rate since August 1991. The increase in the annual rate was due to small upward effects from a variety of the more detailed classes. The largest came from cultural services (eg, live music events), games, toys and hobbies and package holidays. 

Food and non-alcoholic beverage prices rose by 18.4% in the year to May, down from 19.1% in April and from 19.2% in March, which was the highest annual rate seen for over 45 years. The latest easing in the annual rate reflects a monthly rise of 0.9% between April and May, compared with a larger 1.5% increase between the same two months a year ago.

The annual inflation rate for transport eased slightly from 1.6% in April to 1.3% in May. This continues the downward trend in the rate since June 2022. a large downward effect from motor fuels offset by upward effects from air fares and second-hand cars. There were also smaller downward contributions from new cars, and maintenance and repairs. Motor fuel prices fell by 13.1% in the year to May 2023, compared with a fall of 8.9% in April. In contrast, air fares rose by 20% between April and May this year, The largest upward effect came from European routes as the timing of Easter influenced the movements in fares. This year, April prices were collected after Easter and resulted in a relatively low April figure published last month. Last year, April's price collection spanned the Easter period and resulted in a relatively high April figure. Second-hand car prices rose by 0.9% on the month this year, compared with a fall of 1.7% a year ago.

Responding to the latest UK inflation figures, Suren Thiru, Economies Director for ICAEW, said: “May’s hotter than expected outturn suggests that the fight against inflation is far from over, particularly given sky-high food bills and rising core inflation.

“The UK’s inflation trajectory over the summer is largely locked in, with lower gas and electricity bills from July set to drive notable falls in the headline rate. While core inflation is proving troublesome, the painful squeeze on consumer spending from soaring mortgage costs and higher taxes should soon put it on a downward path.

“Although another interest rate rise on Thursday looks inescapable, further tightening will do little to address current inflationary pressures and instead risks deepening the financial pain facing people and businesses.”

For further information, read the ONS Consumer price inflation

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