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UK set for highest inflation among G7 until 2024, say economists

The UK is expected to have the highest inflation rate in the G7 not only this year but also in 2023 and 2024, according to economists, reflecting how Britain is grappling with a toxic combination of price hikes recorded in Europe and North America. .

A Financial Times analysis of the causes of price increases in the world’s major economies shows that Britain – where inflation hit a 40-year high of 9 percent in April – is combining the worst aspects of other G7 countries.

The UK is facing a huge increase in energy prices, like many countries in mainland Europe. But Britain is also grappling with a broad rise in the prices of other goods and services, such as North America.

Energy prices, a combination of electricity, gas and road fuels, contributed 3.5 percentage points to the UK’s 9 per cent inflation rate in April, about the same as in Germany and Italy. It shows how Europe was heavily exposed to rising energy prices as the global economy reopened after the Covid-19 pandemic, and the Russian invasion of Ukraine compounded the problem.

Meanwhile, other goods and services contributed 5.5 percentage points to inflation in the UK in April, on a par with the US and Canada. As the pandemic has eased, goods and services have risen in price as consumer spending exceeds companies’ ability to meet demand.

This combination of inflationary factors from Europe and North America puts the UK in the unenviable position of the G7’s highest inflation in April, and economists expect the situation to last through 2024.

Bar chart of the annual average inflation rate (%) showing that economists expect the UK to have the highest inflation rate in the G7 until 2024

It shows how UK inflation risks falling well above the Bank of England’s 2 percent target for an extended period of time.

Ben Nabarro, an economist at Citigroup, said the government’s plan to compensate households for increases in the cost of living “raises the risk of more persistent [UK] inflation,” exacerbating the BoE’s dilemma in deciding how far to raise interest rates to curb price increases.

“This suggests the trade-off facing monetary policy between [economic] growth and inflation are likely to become more challenging,” he added.

The UK rocketed to the top of the G7 inflation rankings last month when April’s figures included a 54 percent rise in the regulated energy price ceiling that determines the level of gas and electricity bills for most UK households.

This pushed annual energy inflation including petrol in the UK to 52 per cent, higher than in any other G7 country. It rose 39 percent year-on-year in Italy in April.

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France has put strict limits on the increase in household energy bills, while the US, Canada and Japan – by either being self-sufficient in gas or relying much less on it for electricity generation compared to many European countries – have not experienced huge price increases .

Gasoline was the source of the largest price increases in the US, rising 44 percent in April, compared to 31 percent in the UK. Road fuels have risen more in the US because taxes on gasoline and diesel are much lower, so costs fluctuate more with the global oil price than in most European countries.

Japan, which has been struggling with problematically low inflation since the early 1990s, had a rate of 2.5 percent in April, 1.4 percentage points of which due to increases in energy prices.

BoE governor Andrew Bailey suggested last month that global forces like Russia’s invasion of Ukraine and China’s zero-covid policy were behind rising inflation in the UK — which the central bank expects to fall 10 percent in the fourth quarter. to achieve.

“To predict 10 percent inflation and then say . † † “There’s not much we can do, about 80 percent of it is, I can tell you, an extremely difficult place to be,” he told MPs last month, blaming the price increases on “energy and traded goods’.

The FT analysis of the drivers of inflation in the G7 countries shows how the UK combines the negative factors found in both mainland Europe and North America.

Energy price increases contributed just 38 percent to inflation in the UK in April, compared with 50 percent in France and Germany and nearly 60 percent in Italy and Japan.

It meant that other goods and services provided 62 percent of UK inflation, compared to 74 percent in the US and 75 percent in Canada.

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High inflation is common in a wide variety of goods and services in Britain. More than 80 percent of the goods and services in the UK included in the official inflation calculation have risen by more than 3 percent in the past year.

This points to an imbalance between the level of UK consumer spending and the ability of businesses to deliver, partly due to additional trade barriers that came with Brexit.

Different spending patterns of British consumers compared to their counterparts elsewhere in the G7 are not clearly responsible for the higher inflation in Britain.

The FT recalculated the G7 inflation rates based on UK spending patterns, which tend to be less focused on food and more on restaurants and leisure activities, but it made little difference to the overall comparisons between countries.

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The broad nature of UK inflation begs the question of whether the BoE has the will to take tough enough measures to tame it.

While economists expect inflation to begin to decline later this year, there is growing concern among business leaders that excessive price increases will continue.

The Institute of Directors, a corporate lobbying group, found in a survey that just 28 percent of respondents last month believed inflation would fall to the BoE’s target of 2 percent by the end of 2023, up from 33 percent in April.

Kitty Ussher, chief economist at IoD, said: “Disappointment in the UK macroeconomic performance, particularly around inflation but also in the day-to-day impact of Brexit, is impacting the very real investment decisions of business leaders.”

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