UK inflation exceeded expectations in the fourth month, increasing the pressure on the Bank of England (BOE) to increase more aggressively. Traders are pricing in a 6% peak rate through December.
The UK’s Office for National Statistics announced on Wednesday that the Consumer Price Index rose 8.7 percent year-on-year in May. Core inflation, which does not include food and energy, rose surprisingly from 6.8 percent to 7.1 percent.
Economists had expected the headline CPI to rise 8.4 percent year-on-year while core inflation remained at 6.8 percent.
Traders’ interest rate expectations rose after the data. Traders are pricing a 6% peak rate through December. This expectation points to another 150 basis points increase in interest rates this year.
The UK continues to be negatively differentiated among major economies, with inflation more than four times higher than the central bank’s 2 percent target. BOE Chairman Andrew Bailey is concerned about signs that inflation is more persistent, despite the fastest rate hikes in four decades.
While the BOE expects inflation to drop sharply this year, economists warn Prime Minister Rishi Sunak may struggle to meet his target of halving inflation.
The BOE raised interest rates from 0.1 percent to 4.5 percent in 12 consecutive meetings and is expected to raise rates by another quarter point to 4.75% on Thursday.