Despite the recent positive assessment of the UK economy, the International Monetary Fund (IMF) cautioned against premature celebration of a significant decline in the main inflation rate.
The current inflationary landscape in the UK involves two distinct trends: the primary rate is declining, albeit less sharply than expected, while the broader concern revolves around the potential persistence of inflation across the economy.
The ongoing decline in the main rate is a mechanical consequence of the substantial energy price increases from a year ago, now integrated into the calculation. However, the more significant worry lies in the entrenchment of inflation across various sectors, which may endure even as energy prices stabilize. Recent figures indicate evidence of this concern, as measures of core inflation and services inflation have shown an uptick.
Factors contributing to lingering inflation include double-digit increases in mobile phone bills linked to existing interest rates, delayed impacts of previous energy price rises on food prices, and substantial pay rises in workforce shortage areas. The global stubbornness of inflation is attributed to the dual shocks of the Covid pandemic disrupting supply lines and the Russia-Ukraine war elevating gas and oil costs.
While historical data suggests that double-digit inflation tends to persist for two to three years, the current figures raise questions about the stickiness and stubbornness of UK inflation compared to other countries. With inflation at 8.7%, the UK surpasses France, Germany, and the US. Notably, the UK boasts the highest core inflation in the G7 and now the highest food inflation as well.
Some attribute the UK’s inflation premium to timing differences in energy support measures, while others at the Bank of England suggest reduced competition on prices from European firms. Chancellor Jeremy Hunt cautioned against hasty international comparisons, emphasizing the rapidly changing economic landscape.
At the government level, the hope is that the UK’s economic performance surpasses statistical indications, generating more inflation. While this is initially welcome, it poses an extended challenge for the Bank of England, which is poised to raise interest rates closer to 5% to address inflationary pressures.
