Why is inflation so high in the UK?
“Five pounds in Britain today will only go as far as four pounds did in 2019,” says Andy Bruce on Reuters. The annual rate of consumer price inflation (CPI) stayed in double digits in March for the seventh consecutive month, although it fell slightly from 10.4% in February. At 10.1%, it is far higher than the rates in the euro area (6.9%) or the US (5%).
The immediate culprit is energy costs. Consumer energy prices were 79% higher in March than in March 2021. The UK’s “heavy reliance on gas for power generation and home heating” and poorly insulated houses have left it especially vulnerable to surging natural gas prices. Meanwhile, food prices rose by 19.1% in the year to March, the biggest jump since 1977.
The gap with Europe is “partly a matter of timing”, owing to different arrangements for each country’s energy price caps, says The Economist. Headline inflation is bound to have fallen in April because of “base effects” as last year’s big energy price surge drops out of the figures (annual inflation figures compare price changes with the same month 12 months before). On the “core inflation” measure, which strips out volatile food and energy costs, Britain appears “more typically European”, with an annual rate of 6.2%, not much higher than 5.7% in the eurozone.
“Many economists think UK and eurozone inflation are essentially similar,” agrees Chris Giles in the Financial Times. More concerning than energy is the fact that the UK labour market looks especially tight – “the UK’s 6.9% annual growth in privatesector pay is higher than the eurozone’s business-sector wage increase of 5.2% and the 4.2% seen in the US”. That could spell persistently higher inflation ahead.
Signing on sick
The number of British people “who can’t work because of illness” hit “a record high of 2.53 million in the three months through February”, says Paul Hannon in The Wall Street Journal. The rise reflects “an overwhelmed state-run health system that accumulated a huge backlog of cases during the pandemic”. Brexit has also choked off the supply of new workers. “The UK has endured the worst of both worlds – a big energy shock (like the eurozone) and labour shortages (even worse than the US),” says Ruth Gregory of Capital Economics. So our CPI inflation is “higher than all other western European countries and further above the US rate than at any time since the current set of data began in 1989”.
Headline inflation “will fall significantly over the coming months” because of declining energy costs. Yet labour market pressures mean getting inflation back to target “may take longer in the UK” than elsewhere, with core inflation staying higher than in peer countries through “late 2024”.
Interest rates are now expected to rise to 5% (from 4.25%) to curb inflation, creating a “devastating squeeze” on households, says Ben Marlow in The Telegraph. Inflation is more than five times the official target. The Bank of England has “repeatedly failed to fulfil its basic mandate”. It “failed to see inflation coming when it was screamingly obvious... then buried its head in the sand and hoped for the best when prices began spiking”. If governor Andrew Bailey were “the boss of a FTSE 100 multinational he would have been fired long ago”.