May saw core inflation reach its highest level in 31 years, indicating that the Bank of England may need to raise interest rates beyond previous expectations.

Inflation rose to a new 31-year high in May, suggesting further interest rate rises will be needed to bring it under control.

Core inflation, which excludes volatile categories such as food and energy, increased to 7.1% during the month, while headline Consumer Prices Inflation stalled at 8.7%.

The data caught economists by surprise, as both the Bank of England and markets had expected the figures to show a fall in inflation.

It led to predictions that interest rates may have to rise to 6% to bring it back under control.

The figures came as the Bank’s Monetary Policy Committee (MPC) begins its two-day interest rate setting meeting, with some economists predicting it will now increase the Bank Rate by 0.5% – rather than the 0.25% previously expected – to 5% on Thursday.

Why is this happening?

While inflation is now falling in the US and Eurozone, it remains stubbornly high in the UK.

This is because inflation in the UK is now being driven by wage increases, rather than external factors, such as the conflict in Ukraine.

In fact, fuel price inflation, which had previously driven inflation up, fell from -8.9% to -13.1% in May, while the rate at which food prices are rising eased from 19.1% to 18.3%.

With inflation in the UK becoming more entrenched, it will take longer to tackle, and this means interest rates are likely to have to rise higher than previously expected.

But it is important to remember that if the Bank Rate does peak at 6%, this is only slightly higher than the 5.5% to 5.75% markets had previously been expecting, while some commentators think rates will only have to rise to 5.25%.

Despite today’s figures, economists continue to expect inflation to fall steeply in the second half of this year, enabling the MPC to begin cutting the Bank Rate during the first quarter of 2024.

What does this mean for mortgages?

The mortgage market is already responding to higher than expected inflation, with lenders withdrawing nearly 400 products for repricing during the past month.

The situation has pushed up the average cost of a two-year fixed rate mortgage up to 6.15%, while five-year ones now stand at 5.79%.

The recent large-scale reprising means much of the bad news has already been factored into mortgage rates, so they should not rise too much further in response to today’s news.

After increasing by nearly 1% during the past month, two-year Swap rates, upon which fixed rate deals are based, edged only fractionally higher in early trading.

What should I do if I’m struggling with my mortgage?

Chancellor Jeremy Hunt today said he would ensure that banks were living up to the commitments they made to the government in December to help borrowers who got into difficulties.

At the time, lenders agreed to be more flexible in the way they approached borrowers who have been impacted by the cost-of-living squeeze.

Alongside offering tailored support to those in difficulties, they also agreed to enable customers who were up to date with their payments to switch to a new mortgage deal without having to do another affordability test.

In addition, they pledged to ensure highly trained and experienced staff were on hand to help customers when needed.

If you are struggling to pay your mortgage, you should contact your lender as soon as possible.

Options to help you are likely to include increasing your mortgage term or switching you to an interest-only mortgage to help reduce your monthly repayments.

Your lender may also offer you a short-term payment holiday to give you some breathing space, although interest accrued during this time will be added to the total amount you owe.