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The Bank of England will raise interest rates by 50 basis points as it races to put a lid on UK inflation expectations following fresh data confirming price rises are becoming increasingly embedded in the UK, according to an independent research specialist.

"In response to May’s inflation data, released earlier today, we now expect the MPC to raise interest rates by 50bps to 5.00% at tomorrow’s meeting," says Neil Shearing, Group Chief Economist at Capital Economics.

Following the inflation data, money market data showed investors moved to price in an additional 160bp worth of rate increases, up from 140bp yesterday.

For tomorrow’s meeting, markets price in a 60% chance of a 25bp rate hike but a 40% chance of a return to a larger 50bp step change.

"A lot of attention has focussed on the fact that inflation failed to fall in line with expectations last month and was instead unchanged at 8.7%. But the bigger concern in our view is that core inflation rose yet again, hitting a 31-year high of 7.1%," says Shearing.

The ONS reported midweek that UK headline CPI inflation was unchanged in May at 8.7% year-on-year but the figure was above the consensus expectation for a reading of 8.4%.

The surprise was driven by a 0.7% increase month-on-month, down from 1.2% in April but above expectations for a reading of 0.5%.

The all-important core CPI inflation accelerated from 6.8% y/y in April to read at 7.1% in May, a record high, blowing apart consensus expectations for 6.8%.

"This marks the UK out from other advanced economies, including the euro-zone and the U.S., where core inflation has started to fall," says Shearing.

He explains there are several factors at play, but an important one is that inflation appears to have infected the labour market and wage setting to a greater extent in the UK than elsewhere.

Shearing warns a failure to deliver a 50bp hike could cause financial conditions to loosen and the Pound to weaken, "which is the last thing that policymakers at the Bank need right now".