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Why is Inflation in the UK Worse Than in Other Major Economies?

UK inflation remained stubbornly high in May at 8.7% – the same as the previous month – despite a string of forecasts earlier this year predicting a sharp fall in response to tumbling energy prices.

Official figures had been expected to show that the UK’s consumer prices index (CPI) eased slightly last month, to 8.4%. But unlike almost everywhere else in the world, that didn’t happen.

The inflation rate has fallen from a peak of 11.1% last October but household bills are still rising at the fastest rate in the G7. Supermarket inflation has eased to its lowest level this year, yet remains at its sixth-highest level since the financial crisis in 2008.

As recently as March, Goldman Sachs was predicting UK inflation could drop quickly through the summer and autumn to below 2% by the end of 2023.

Once it was clear Europe’s major economies could cope without Russian gas and wholesale gas prices had slumped, every G7 country would enjoy an inflation dividend, was the majority view. In January, the price of a kilowatt hour of gas was down to almost pre-pandemic levels.

In the US, the impact of falling energy prices has been greater. The inflation rate has dropped to 4% from a peak of 9.1% last summer. Canada benefits from a 4% inflation rate while, in April, Japan registered a 3.4% increase in consumer costs.

In Germany, the inflation rate dropped from 6.8% in April to 6.3% in May while in France it was even larger, to 6% from 6.9% in the previous month.

And the eurozone average inflation rate eased more than expected in May, declining from 7% to 6.1% year-on-year, with Italy an outlier after it registered a rate of 8%.

Lower petrol and gas prices meant energy reduced inflation across the eurozone by 1.8%.

Setting the UK apart is a jobs market that is struggling to recover from the Covid-19 pandemic, Brexit visa rules and the decision by many older workers to quit the employment scene.

In France, the rate of worker participation is higher than before the pandemic. That is to say, a higher proportion of working age people have a job or have registered to work. In the UK, the participation rate has declined, driving up wages and maintaining the pressure on prices.

The UK also imports more than 50% of its food, mostly from the EU, which has proved to be badly affected by rising raw materials costs. Food prices have risen at more than 18% for most of the year, pushing the overall UK inflation rate above those of rival economies.

Subsidies in other countries have also acted to suppress inflation. For instance, France capped energy prices last year and only lifted the cap when prices had fallen in the spring, preventing a big increase in consumer bills.

More recently, Germany introduced a monthly €49 public transport ticket, which can be used across the country on regional and local trains, that economists said subtracted as much as 0.1 percentage points from eurozone inflation on its own.

Source : TheGuardian