Exploring the Factors Behind the UK’s High Inflation Rates

The UK is currently facing high inflation, ranking in the relegation zone of the G20 table alongside only Turkey and Argentina, with a 10.1% CPI figure in March.

In contrast, the eurozone has a 6.9% CPI figure, and the US has 5.0%.

During the pandemic, all major economies drastically increased their money supply, and all were affected by the war in Ukraine, but the UK is still experiencing significantly higher inflation rates.

Energy and food prices are significant contributors to the inflation rate.

As a net energy importer, the UK was hit harder than the US, which is a net energy exporter, when the cost of heating and electricity skyrocketed after Russia’s invasion of Ukraine.

Longer supply chains due to increased paperwork at the post-Brexit border are a significant factor in higher food costs, which have risen at the fastest rate since 1977.

This means that when there is a supply shock, as caused by weather in recent months, UK shelves are hit harder.

Core inflation, which gives a better picture of the long-term trend in prices, is still high in the UK and ahead of the US and eurozone, with little sign of improvement after a rise to 6.2%.

This is mostly due to labour costs, with services, where the labour market has the most significant impact, seeing prices rise faster than core goods.

Brexit and the state of the National Health Service (NHS) have contributed to this labour cost rise.

NHS waiting lists contribute to labour market inactivity through long-term sickness, and Brexit has also played a part in this.

Interest rates are meant to cool the demand side of the economy, but rate hikes have not hit UK households yet due to a couple of factors.

First, fixed-rate mortgages have become increasingly common, meaning that the time it takes to cut back spending elsewhere will take longer.

Equity release is also more specific to the UK, where homeowners can use the increased value of their houses to keep paying for goods where they might otherwise cut back.

Experts believe that the difference in inflation rates between the UK and other wealthy countries will work itself out over time, and headline inflation should come down significantly when last April’s energy price cap rise falls out of the equation.

However, as the US, EU, and UK all struggle to get price rises back to their 2% targets, the UK may be the last to reach the finish line.

Commentary:

The UK’s inflation rate has been a concern for some time now, and this article sheds light on the factors that contribute to this issue.

Energy and food prices have a significant impact on inflation rates, and Brexit and the state of the NHS have also played a part in labour cost rise.

Interest rates are meant to cool the demand side of the economy, but rate hikes have not hit UK households yet due to factors such as fixed-rate mortgages and equity release.

It is encouraging to know that experts believe the difference in inflation rates will work itself out over time.

However, it is essential to keep a close eye on the situation and take necessary measures to tackle inflation if it continues to persist at high rates.