Causes, consequences of UK’s stubbornly-high inflation

Energy subsidies, big price rises across the economy following the coronavirus pandemic led to the high inflation rate.

British pounds and pence
British inflation remains high due to rising prices across the economy [File: Peter Macdiarmid/Getty Images]

The United Kingdom’s inflation has remained stubbornly high at 8.7 percent in May – the same rate as the previous month – pressuring the Bank of England (BoE) to take action.

The BoE is expected to raise interest rates – a monetary measure used to control inflation – on Thursday for the 13th consecutive time.

The central bank is an independent body.

Meanwhile, the inflation rate in May stood at 4 percent in the United States. Japan saw inflation at 3.4 percent, while Germany registered inflation at 6.3 percent and France’s inflation stood at 6 percent.

Why is inflation so high?

Previous BoE forecasts had predicted that the UK’s inflation rates would ease by dropping to just above 5 percent in the final quarter of 2023 and falling below its 2 percent target in early 2025.

But big price rises across the economy, energy subsidies and Britain’s struggling post-pandemic jobs market have led to soaring inflation rates.

British inflation also accelerated sharply after Russia’s full-scale invasion of Ukraine in February 2022, which sent natural gas prices soaring across Europe.

The Office for National Statistics said core inflation – a measure that excludes volatile food, energy, alcohol and tobacco prices, and which the BoE views as a good guide to underlying price pressures – unexpectedly rose to 7.1 percent from 6.8 percent, its highest since March 1992.

Another measure of underlying pressures – services inflation, which is heavily influenced by fast-rising wages and Britain’s tight post-pandemic job market – also reached its highest since 1992 at 7.4 percent.

“The cost of airfares rose by more than a year ago and is at a higher level than usual for May,” Office for National Statistics chief economist Grant Fitzner said.

“Rising prices for second-hand cars, live music events and computer games also contributed to inflation remaining high.”

But food and drink price inflation dropped slightly to 18.3 percent from April’s 19 percent.

Meanwhile, producer price inflation also slowed much more sharply than economists had expected, with prices charged by manufacturers rising by 2.9 percent in the 12 months to May, down from an increase of 5.2 percent in April.

What is the British government doing about it?

Tackling inflation has been British Prime Minister Rishi Sunak’s priority before the general election next year.

“I’m working day in and day out to give families the support they need, while working to halve inflation, reduce debt and grow the economy,” he said on Twitter, a day before May’s inflation figures were released.


Mortgage costs are likely to increase for millions of homeowners, with Chancellor of the Exchequer Jeremy Hunt ruling out financial support for mortgage holders.

“Today’s figures strengthen the case for the government to stick to its guns,” Hunt told reporters in the UK.

“If you look at what’s happening in other countries, you can see that rises in interest rates do bring down inflation over time, that will happen here,” he added.

Markets see a 40 percent chance that the BoE will raise interest rates by half a percentage point to 5 percent, rather than the quarter-point move previously expected, in an effort to control inflation.

Paul Dales, chief UK economist at Capital Economics, told the Reuters news agency that he now forecasts the BoE raising interest rates by half a percentage point on Thursday after the latest numbers.

“The problem is that the recent surge in core inflation and the re-acceleration in wage growth shows that domestic inflationary pressures are still strengthening,” Dales said.

“This suggests the Bank may have more work to do than the Fed or ECB [European Central Bank].”

Source: News Agencies