June 3, 2023

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UK inflation slowed in April, but remained stubbornly high

The slowdown in inflation was less than the Bank of England’s forecast, which had forecast 8.4% for April. Inflation data has repeatedly shown it higher than the bank expects, adding to the challenge for policymakers tasked with bringing inflation down to the 2 percent target. Since December 2021, the central bank has raised interest rates to 4.5 percent from nearly zero, making loans, especially mortgages, more expensive.

With energy prices falling, food prices have become the largest contributor to inflation. In April, food prices rose 19 percent from a year earlier, just down from 19.1 percent in March, the fastest pace since 1977.

Food items accounted for more than 2 percentage points of the total average. Prices of bread, fish and dairy products were among those that continued to rise last month.

Britain’s statistics agency said on Tuesday that food inflation in Britain is among the highest in developed economies. The war in Ukraine and severe weather drove up food prices, exacerbated by a labor shortage.

On Tuesday, Jeremy Hunt, Britain’s chancellor of the exchequer, met with food producers and the British regulator for a food cost competition, but did not announce any plans to cut costs.

Britain’s inflation rate peaked at 11.1% in October, the fastest pace since 1981, driven largely by the energy price shock that hit Europe. Like the US labor market, Britain has been slow to recover from the pandemic, forcing companies to raise wages to retain workers, adding further inflationary pressures.

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Economists say one reason Britain’s inflation rate is lower than that of the US (at 4.9 per cent) and the eurozone (7 per cent) is the way energy prices are factored into the calculation. The UK Energy Regulatory Authority sets a cap on the prices paid by households. This cap is reset every quarter. When energy prices began to rise more than a year ago, this system temporarily insulated households from the hike. Now that wholesale energy prices are down, it’s taking longer for household bills to reflect that change.

In general, British households and businesses have shown resilience in the face of higher prices. On Tuesday, the International Monetary Fund said it no longer expects Britain to experience a recession this year, an assessment also made recently by the Bank of England.

However, stronger expectations may make inflationary pressures more persistent.

“Even as headline inflation is down,” central bank governor Andrew Bailey told lawmakers this month, policymakers are paying “particular attention to signs of persistent inflation.”

The drop in April is the strongest sign that UK inflation has turned a corner. If energy prices continue to fall, inflation is expected to continue falling this year.

But the speed of this decline is uncertain. Food prices are expected to rise more slowly, but economists are not sure how long that will last. Inflation in the services sector means that the Bank of England’s campaign to rein in inflation will continue. The government’s target of halving inflation this year – an inflation rate of 5 per cent by the end of December – is in danger of being felled.

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