This week, the gulf between the price pressures in Britain and the US is likely to reach levels not seen since late 1970s as Britain becomes an inflationary outlier on the global stage.
The figures released last week confirm that US consumer prices are falling fast. In fact, the annual number for June fell to a 2-year low of 3%. This is in contrast to economists’ expectation that the CPI reading of last month for the UK will be above 8 percent.
As of Friday, economists polled for Reuters had predicted, on average, a June figure of 8.2 percent. If they’re right, UK inflation would be 5.2 percentage points above the US. This is the largest gap since November 1977 when the US was plagued by economic stagnation.
Victoria Scholar, the head of Interactive Investor’s online investment service, said that “the drop in US Inflation sheds light on UK’s persistent problem with inflation.”
Economists attribute the UK’s high inflation to a combination between EU-style energy prices and US style labour shortages.
Simon MacAdam is an economist with Capital Economics. He said that the UK has higher inflation than the US. This is because the UK has experienced a greater energy shock and more severe labour shortages. Goods inflation also rose and then started to decline later in the UK.
The US and most of Europe have also seen a decline in food price inflation. This is partly due to the UK’s dependence on imported goods and the weather, which has limited crop production.
In the past, US and UK measures of inflation have been closely correlated. Over the last year, however, there has been a noticeable gap.
US inflation started declining in the fall of 2022, after reaching its highest level for decades in June last year. This was due to falling energy costs and slower food inflation. In the UK, inflation continued to rise in the autumn as a result of an increase in European energy prices.
The UK’s inflation rate has fallen since October when it peaked at 11,1 per cent, but less dramatically than in other parts of Europe.
In the eurozone where inflation reached a peak of 10.6 percent last October, it is now 5.5%, with the price increase in Spain even falling below the European Central Bank target of 2%.
In emerging markets too, inflation is falling as the effects of the pandemic of coronavirus and the surge in commodity prices at the beginning of the Ukraine conflict are no longer reflected on the indices. Price pressures in Brazil fell from over 12 percent in April 2022, to only 3.2% 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. The country also holds large stocks of grain, and continues to buy large quantities of energy from Russia.
The gap between the UK & US is widening despite the Bank of England abandoning their near-zero rate policy in front of the Federal Reserve.
The Fed began raising rates in March 2022 while the BoE started in the fall of 2021. The Fed tightened rates more quickly than the BoE once it began. Rates were raised by 5 percentage points within just one year.
The ECB didn’t begin increasing interest rates until summer 2022.
Susannah Streeter is a senior investment analyst with asset manager Hargreaves-Lansdown. She said that strong wage growth in the UK raised the possibility of inflation staying high for a while, especially since consumer spending has been more resilient than expected.