The International Monetary Fund's recent caution about over-enthusiastic celebration of the UK's economy coincided with persistent concerns about inflation, despite the overall rate declining beneath the 10% mark. Two inflation trends are unfolding simultaneously, and it's the long-term entrenchment of inflation throughout the economy that is causing the most worry.
Several factors indicate that inflation may continue to have a pervasive impact, even if energy costs stabilize. Recent data indicates increased inflation in services and core areas, as demonstrated by double-digit increases in mobile phone bills and food prices. Salary hikes in sectors facing worker shortages might also contribute to maintaining high prices.
Inflation stubbornness is a worldwide issue, particularly in light of the pandemic's disruptions to global supply chains and the hike in gas and oil costs due to Russia's conflict with Ukraine. Historically, double-digit inflation has taken two to three years to settle, but it's worth asking if UK inflation is proving more stubborn than in other countries.
In the UK, the 8.7% inflation rate surpasses those of France, Germany, and the US, marking the UK with the highest core and food inflation in the G7. Timing differences on energy support measures might partially explain this disparity. Furthermore, Bank of England officials suggest that UK producers are facing less price competition from European firms, potentially slowing the decline of the price surge.
Chancellor Jeremy Hunt cautions against hasty international comparisons in such a rapidly changing landscape, stressing the unpredictability of economic growth rates. The government's hope is that the UK's economy is performing better than what the data indicates, thus leading to higher inflation. However, this potentially complicates the Bank of England's task of mitigating price pressures, likely leading to interest rates rising closer to 5%.