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UK economic outlook ‘unclear’ as inflation hits 40-year high

Pay is not keeping up with rising prices and trade unions have warned of widespread strikes as railway staff stage mass walkouts this week

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UK Finance Minister RIshi Sunak says government will do all it can. Photograph: PA

UK Finance Minister RIshi Sunak says government will do all it can. Photograph: PA

UK Finance Minister RIshi Sunak says government will do all it can. Photograph: PA

Soaring food prices pushed British consumer price inflation to a 40-year high of 9.1pc last month, the highest rate out of the Group of Seven countries and one which underlines the severity of the country’s cost-of-living crunch.

The reading was up from 9.0pc in April and matched the consensus of a Reuters poll of economists. Records from the Office for National Statistics show May’s inflation was the highest since March 1982 – and worse is likely to come.

Sterling, one of the weakest currencies against the US dollar this year, fell below $1.22, down 0.6pc on the day, before later recovering.

Some investors judge Britain to be at risk of both persistently high inflation and recession, reflecting its large imported energy bill and ongoing Brexit-related friction which could further hurt trade ties with the European Union.

“With the economic outlook so unclear, no one knows how high inflation could go, and how long it will continue for - making fiscal and monetary policy judgements particularly tough,” said Jack Leslie, senior economist at the Resolution Foundation think tank.

Earlier the Resolution Foundation said the cost-of-living hit for households was being compounded by Brexit, with damaging long-term implications for productivity and wages.

Average pay is not keeping up with inflation and trade unions have warned of widespread strikes in the coming months. Railway staff have already staged mass walkouts this week.

Britain’s headline inflation rate in May was higher than in the United States, France, Germany and Italy. While Japan and Canada have yet to report consumer price data for May, neither are likely to come close.

The Bank of England said last week that inflation was likely to remain above 9pc over the coming months before peaking at slightly above 11pc in October, when regulated household energy bills are due to rise again.

Financial markets show UK interest rates are on course to rise above 3pc around the turn of the year from 1.25pc now, although most economists think waning economic growth means the BoE will raise rates by less than that.

Finance minister Rishi Sunak said the government was doing all it could to combat a surge in prices and the central bank would act “forcefully” to contain inflation.

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