UK economy grows but fears remain over rising prices

The UK economy rebounded in May after shrinking in April and March, official figures show.

The economy grew by 0.5% during the month, the Office for National Statistics (ONS) said, higher than the flat growth most economists expected.

Every area of the economy expanded including construction, travel and manufacturing.

However, businesses reported that higher running costs had led to them to put up prices for customers.

And with household disposable incomes set to fall further in the autumn when energy prices are set to rise again, there is "still a real risk" that the economy could fall into a recession, said Paul Dales, chief UK economist at Capital Economics.

"That may mean the economy proves to be a poisoned chalice for whoever wins the race to be the next prime minister," he added.

Conservative MPs will cast their first votes in the leadership contest on Wednesday, but whoever replaces Boris Johnson is faced with the dilemma of how to tackle the soaring cost of living.

Both businesses and households are being hit by rising prices, which are surging at their fastest rate for 40 years due to record-high fuel and energy costs.

UK inflation, the rate at which prices rise, hit 9.1% in May, and is expected to reach 11% later this year.

Andrew Bailey, the governor of the Bank of England, has vowed to bring inflation down to its target of 2%, "no ifs or buts". It has raised rates five times since December and is expected to put them up again next month. He has indicted the Bank will "act forcefully" suggesting it could raise rates by more than 0.25%.

The rise in the cost of living has led to unions calling for pay rises to help workers cope. Several industries, such as the railways, have seen workers strike over pay.

But the government has warned against employers handing out big increases in salaries over fears of a 1970s-style "inflationary spiral", where firms hike wages and then pass the cost on to customers via higher prices.