Inflation last month unexpectedly rose due to the UK’s faster rate of cost-of-living increases than the majority of other advanced countries in the globe.
Prices rose by 10.4% in the year to February, outpacing inflation in the US and the Eurozone, which has slowed to 6% and 8.5%, respectively.
The UK’s inflation rate has consistently been higher on average than the US and other major countries in Europe during the past year, even though inflation is unpredictable, and it would be a mistake to draw too many conclusions from one month’s worth of data.
Many people are beginning to wonder if the UK has its own inflation issue as the cost of living continues to deplete household budgets.
We examine three elements that affect price growth:
Food costs are rising
The continued rise in food prices in the UK was one of the major contributors to February’s inflation increase.
Last month saw an increase in food inflation of 18.2% when compared to the same time last year. Recent rises in consumer costs are a result of lettuce and vegetable shortages.
Some of the items in short supply include tomatoes, peppers, and cucumbers, mostly as a result of inclement weather in Spain and North Africa ruining harvests. The UK imports a lot of this stuff from abroad during the winter.
According to Minette Batters, president of the National Farmers Union, the shortages have also been made worse by high energy prices in the UK, which has forced farmers and vegetable growers to reduce crop yields or stop producing specific commodities altogether due to rising operating expenses (NFU).
It’s a “very complex picture,” she says, but all of the union’s farmer surveys indicate that firms are decreasing. The more the sector contracts, the more rationing is implemented, which just increases food inflation.
Farmers have also claimed that retailers and supermarkets do not fairly compensate them for their produce, and the government’s food tsar has claimed that because supermarkets have “fixed-price contracts” with suppliers, some producers choose to sell less to the UK and more to other parts of Europe when food is in short supply.
Gas pricing at wholesale
Since Russia invaded Ukraine, energy prices have increased everywhere. Yet, consumers and businesses in the UK have been more negatively impacted by increasing gas costs than their counterparts in other advanced nations.
According to analysts, the UK is more vulnerable to increases in wholesale gas prices.
The UK appears to be one of the “most sensitive” nations to energy price shocks, according to Jonathan Haskel, a member of the Bank of England’s Monetary Policy Committee that sets interest rates.
He mentioned the UK’s higher gas consumption for domestic heating and lighting than other European nations. He also mentioned that the US produced the majority of its own gas and relied increasingly on liquefied natural gas, whereas gas was largely transferred via pipelines from a small number of suppliers in other countries (LNG).
According to him, UK energy costs “would be expected” to increase more than others when wholesale gas prices rise because UK consumers pay fewer taxes on their electricity and gas than their European neighbors.
On the plus side, bills should decrease more quickly as wholesale costs decrease, which they are predicted to do in the upcoming months.
The EY Item Club’s head economist, Martin Beck, calls February’s increase a “flash in the pan.”
It’s awful news today, but things will get better shortly, he adds.
Lack of labor and salary increases
The UK’s persistently high inflation rate is largely due to the energy price shock, but there are other contributing factors as well, including a severe labor shortage.
All major nations experienced a decline in their labor force during the epidemic.
Although the majority of the world’s top economies have now recovered, the UK still has around 400,000 more unemployed people than it had in December 2019.
According to research by the think tanks UK in a Changing Europe and the Centre for European Reform, Brexit has led to a loss of 330,000 jobs in the UK, notably in the transportation, hospitality, and retail industries.
Additional factors include older people retiring early, young people choosing to study instead of work, and an increase in the number of persons who are absent from work for extended periods of time.
Pay packages have increased as a result of firms spending more to recruit and keep employees due to the labor crisis.
Since they struggle to fill positions, many supermarkets have increased employee pay multiple times.
Andrew Baily, governor of the Bank of England, issued a warning to workers asking for pay increases last year, claiming that doing so could cause inflation to spiral out of control. Unions counter that workers must accept growing living expenses.
Although experts continue to expect price increases to decline in the upcoming months, if the UK experiences further shocks like the one in February and its high inflation rate continues, more concerns about why the UK is an outlier will arise.