U.K. Inflation Slowed in April, but Remains Stubbornly High
Why It Matters: Food prices are the main inflation concern.
The slowdown in inflation was less than the Bank of England’s forecast, which had projected 8.4 percent for April. The inflation data has repeatedly turned out higher than the bank expects, intensifying the challenge facing policymakers tasked with lowering inflation to the 2 percent target. Since December 2021, the central bank has raised rates to 4.5 percent from near 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 lower than 19.1 percent in March, which was about the fastest pace since 1977.
Food accounted for more than two percentage points of the overall rate. The prices of bread, fish and dairy products were among those that continued to increase last month.
Food inflation in Britain is among the highest in advanced economies, the statistics agency said on Tuesday. The war in Ukraine and extreme weather have pushed up food prices, which have been exacerbated by labor shortages.
On Tuesday, Jeremy Hunt, Britain’s chancellor of Exchequer, met with food producers and Britain’s competition regulator about the cost of food, but didn’t announce any plans to lower costs.
Background: An inflation rate still higher than in the U.S. and Europe.
Britain’s inflation rate peaked at 11.1 percent in October, the fastest pace since 1981, driven largely by the energy price shock that hit Europe. Like the U.S. labor market, Britain’s was slow to rebound from the pandemic, forcing businesses to push up wages to retain workers, adding another inflationary pressure.
One of the reasons Britain’s inflation rate has been slower to decline than in the United States (where it is 4.9 percent) and the eurozone (7 percent), economists say, is the way energy prices are factored into the calculation. Britain’s energy regulator sets a cap on prices households pay. That cap is reset every quarter. When energy prices started rising more than a year ago, this system temporarily insulated households from that surge. Now that wholesale energy prices have fallen, it is taking longer for household bills to reflect that change.
On the whole, British households and businesses have shown resilience to high prices. On Tuesday, the International Monetary Fund said it no longer expected to Britain to experience a recession this year, an assessment the Bank of England had also made recently.
But the stronger outlook could make inflationary pressures more persistent.
“Even as headline inflation is coming down,” Andrew Bailey, the governor of the central bank, told lawmakers this month, policymakers are paying “particular attention to indicators of inflation persistence.”
What’s Next: A continued decline in inflation is expected, but how quickly?
The decline in April is the strongest signal that inflation in Britain has turned a corner. If energy prices continue to drop, then inflation is expected to keep falling this year.
But the speed of that decline is uncertain. Food prices are expected to rise more slowly, but economists aren’t sure when that will take hold. Inflation in the services sector means the Bank of England’s campaign to restrain inflation will continue. The government’s target of halving inflation this year — a 5 percent inflation rate by the end of December — is at risk of falling out of reach.
Source: The New York Times
