UK Records Highest Inflation Rate in Western Europe

In March, food and non-alcoholic beverage prices were 19.1% higher than a year earlier, the largest increase since August 1977. Milk and sugar now cost around 40% more than a year ago. The UK’s inflation rate is now the highest in Western Europe and compares to an average of 6.9% in the eurozone and 5.0% in the United States.

Reasons for High Inflation

The UK is expected to experience high inflation for longer than its counterparts due to its reliance on natural gas for heating and electricity, and the structure of government subsidies that smooth out price fluctuations. The Bank of England also fears that high inflation may lead to a sustained increase in wage claims and corporate pricing strategies, exacerbated by a reduction in the workforce following the pandemic and trade and labor market frictions caused by Brexit.

“It is now clear that the UK has a more serious and persistent inflation problem than in Europe and the United States,” said Ed Monk, associate director of personal investment at Fidelity International.

Investors now anticipate an interest rate hike of 4.25% on May 11 following the next Bank of England meeting and that rates will peak at 5% by September, according to futures markets.

Implications for the UK Government

High inflation also poses a problem for the UK government, which predicted in February that inflation would be below 4% by the end of the year. Prime Minister Rishi Sunak pledged in early 2023 to halve inflation, which would require it to fall to around 5% by year-end.

“These figures confirm exactly why we need to continue our efforts to reduce inflation to ease the pressure on families and businesses,” said Finance Minister Jeremy Hunt.

Inflation has also sparked a wave of strikes in the public sector, including among junior doctors demanding a 35% pay increase to compensate for more than a decade of wages not keeping up with their preferred inflation index.

Last week, the International Monetary Fund predicted that inflation would average 6.8% in the UK this year, the highest rate among all major advanced economies, although slightly higher than the 6.2% forecast for Germany.

However, economists remain confident that inflation will begin to decline rapidly from the current quarter, as the significant energy price increases from last year, following Russia’s invasion of Ukraine, are removed from annual comparisons.