The gulf between price pressures in the US and the UK is likely to widen to levels not seen since the late 1970s this week, as Britain increasingly becomes a global inflationary outlier.
Figures out last week confirmed US consumer price inflation is abating fast, with the annual figure for June falling to a two-year low of 3 per cent. That contrasts with economists’ expectations that last month’s CPI reading for the UK, due out on Wednesday, will come in at above 8 per cent.
As of Friday afternoon, economists polled by Reuters expected, on average, a figure of 8.2 per cent for June. If they are right, that would mean UK inflation is now 5.2 percentage points higher than in the US — the widest gap since November 1977, when the country was beset by economic stagnation and political strife.
“The drop in US inflation shines a light on the UK’s persistent inflation problem,” said Victoria Scholar, head of investment at Interactive Investor, an online investment service.
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Economists blame a combination of EU-style high energy prices and US-style labour shortages for the UK becoming the G7 economy most plagued by inflation.
“Inflation is higher in the UK than the US because it has suffered a worse energy shock, worse labour shortages, and goods inflation rose later and subsequently started to fall later than in the US,” said Simon MacAdam, economist at research firm Capital Economics.
Food price inflation, another important aspect of the surge in global prices, has also fallen faster in the US and much of Europe — partially because of Britain’s reliance on imports and weather limiting crop supplies.
Historically the US and UK inflation measures have tended to track one another. However, over the past year, a gap has emerged.
US inflation began declining during the autumn of 2022 after hitting its highest level in decades last June on the back of falling energy costs and slowing food inflation, while UK inflation continued to climb during the autumn on the back of a surge in European energy prices and accelerating services price growth.
While UK inflation has declined since hitting a peak of 11.1 per cent in October, it has done so less dramatically than elsewhere in Europe.
In the eurozone, where inflation hit a high of 10.6 per cent last October, the annual rate is now 5.5 per cent with price growth in Spain falling even below the European Central Bank’s target of 2 per cent.
In emerging markets, inflation is also plummeting as the after effects of the coronavirus pandemic and surge in commodity prices during the early stages of the Ukraine war drop out of indices. In Brazil, price pressures fell from more than 12 per cent in April 2022 to only 3.2 per cent in June.
In China, price pressures are non-existent, with the world’s manufacturer-in-chief immune to the surge in producer prices that has contributed to inflationary pressures elsewhere. It also has substantial stores of grain and continues to purchase large amounts of energy from Russia.
The widening gap between the UK and the US comes despite the Bank of England abandoning its near-zero interest rate policy ahead of the Federal Reserve.
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The Fed first raised rates in March 2022, while the BoE’s hikes began in the autumn of 2021. However, the Fed moved more quickly once it started to tighten, raising rates by 5 percentage points in just over one year.
The ECB did not begin raising interest rates until the summer of 2022.
Susannah Streeter, senior investment analyst at asset manager Hargreaves Lansdown, said strong wage growth raised the prospect of inflation remaining high for some time yet in the UK, “especially with consumer spending proving to be far more resilient than forecast”.
Source: Economy - ft.com
