U.K. Inflation Stays Above 10%, Raising Prospect of Further Interest-Rate Increases
Higher prices for energy, food and other goods and services have weakened household spending in the U.K. Photo: Chris Ratcliffe/Bloomberg News By Paul Hannon April 19, 2023 3:15 am ET The U.K.’s annual rate of inflation declined less than expected in March and remained in double digits, a level of persistent price increases that could mean further hikes in interest rates in the coming months despite a weak economy. March consumer prices were 10.1% higher than a year earlier, a decline in the inflation rate from 10.4% in February, the U.K.’s statistics agency said Wednesday. That rate was higher than expected, with economists having forecast a drop to 9.8%. The core rate of inflation, which excludes volatile items such as energy and food, was unchanged at 6.2%. The March reading l
Higher prices for energy, food and other goods and services have weakened household spending in the U.K.
Photo: Chris Ratcliffe/Bloomberg News
By
The U.K.’s annual rate of inflation declined less than expected in March and remained in double digits, a level of persistent price increases that could mean further hikes in interest rates in the coming months despite a weak economy.
March consumer prices were 10.1% higher than a year earlier, a decline in the inflation rate from 10.4% in February, the U.K.’s statistics agency said Wednesday. That rate was higher than expected, with economists having forecast a drop to 9.8%. The core rate of inflation, which excludes volatile items such as energy and food, was unchanged at 6.2%.
The March reading left the U.K. with the highest inflation rate among the Group of Seven wealthy democracies, with consumer prices rising more than twice as quickly in the U.K. as they did in the U.S. The big difference was energy: While household energy prices were 6.4% lower in the U.S. last month compared with a year earlier, they rose 40.5% in the U.K.
Food prices rose by 19.1% over the 12 months through March, the steepest increase since 1977. Bread and cereals, fruit and chocolate and confectionery saw the largest rises.
Higher prices for energy, food and other goods and services have weakened household spending and prompted a wave of strikes that continue to affect the health and education sectors, even as some transport and logistics disputes are being resolved.
The Royal College of Nursing, a labor union for nurses, last week rejected the government’s most recent pay offer, and plans further strikes on April 30 and May 1. Junior doctors were on strike for four days last week, and have yet to announce plans for further action in an unresolved pay dispute.
Teachers are set to strike on April 27 and May 2—a hit to the wider economy, as some parents will have to stay at home during school closures and may not be able to work as many hours as usual.
That combination of high energy prices and strikes has slowed the economy, even if the recession that was forecast by the Bank of England and others has been avoided for now. The International Monetary Fund last week forecast that the U.K. economy will contract this year, the only one of the 16 countries for which new forecasts were published to suffer that fate.
The U.K. also faces a shortage of workers, with the number of people who can’t work because of illness rising to a record high of 2.53 million in the three months through February. The rise partly reflects an overwhelmed state-run health system that accumulated a huge backlog of cases during the pandemic, which has now led to record-long waits for treatment.
“A tight labor market means it is still difficult for firms to hire the people they need and high inflation means that the value of wages [is] falling,” said Matthew Percival, director for people at the Confederation of British Industry, a lobby group for businesses. “Both of these dynamics are acting as a drag on growth.”
The U.K.’s inflation gap with the rest of the G-7 should narrow in April, when U.K. energy prices will be compared with April 2022 when they jumped by 50%. Economists expect energy prices to fall below their current level from July, contributing to a sharp fall in headline inflation.
The Bank of England shares that expectation, but worries inflation may not fall as fast as it had hoped.
One cause of concern for policy makers is that workers such as nurses will secure much larger pay rises than have been common over recent decades, and that businesses will raise their prices to cover increased payroll costs, setting off a new round of wage demands. Figures released Tuesday showed average weekly pay was 7% higher in February than a year earlier, up from 5.9% in January.
The Band of England has indicated that it may soon pause a series of increases that have taken its key interest rate to 4.25% from 0.1% in 11 steps. But a combination of stubbornly high inflation and rising wages may persuade policy makers to vote for a 12th increase when they next meet in mid-May.
“For those of us expecting the Bank of England to keep interest rates unchanged next month, the latest surprise pickup in U.K. wage growth undoubtedly puts a spanner in the works,” said James Smith, an economist at ING Bank.
Write to Paul Hannon at [email protected]
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