British consumer price inflation defied expectations that it would slow and held at 8.7% in May, official figures showed, a day before the Bank of England is forecast to raise interest rates for the 13th time in a row
Markets increased their bets on further rate rises following Wednesday's official figures, which also showed underlying inflation rose to its highest since 1992 last month.The numbers are uncomfortable for Prime Minister Rishi Sunak - who has pledged to halve inflation over the course of this year before a probable 2024 election - and are likely to add to the rise in mortgage costs for millions of homeowners.
Sterling briefly jumped against the U.S. dollar and the euro after the figures were released and two-year government bond yields - which are sensitive to interest rate expectations - rose to their highest since July 2008. "If you look at what's happening in other countries, you can see that rises in interest rates do bring down inflation over time, that will happen here," he added.
The Office for National Statistics said core inflation - a measure which excludes volatile food, energy, alcohol and tobacco prices, and which the BoE views as a good guide to underlying price pressures - unexpectedly rose to 7.1% from 6.8%, its highest since March 1992. Food and drink price inflation dropped slightly to 18.3% from April's 19.0%, with the biggest downward pressure from milk, cheese and eggs.
Last month the BoE forecast inflation would drop to just over 5% in the final quarter of this year and fall below its 2% target in early 2025.
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