Inflation in Great Britain cooled significantly last month but still remains hot compared to other major western economies including the United States.
Inflation in Britain cooled to 4.6% last month, compared to 3.2% in the U.S. and 3.8% in nearby Germany.
Inflation was running at 8.7% in Britain as recently as May, down from a peak of 11.1% a year ago, as the upward pressure on prices eased in the wake of COVID. The Bank of England has said it doesn’t expect inflation to fall to its target 2% until sometime in 2025.
Reuters reported on June 21 that Britain registered the highest inflation for food compared to other European countries, up 18%. By contrast, food inflation in May was 6.7% in the U.S. For October, the figures were 10.1% and 0.3%, respectively.
“The U.S. and U.K. are facing a totally different scenario,” Tenpao Lee, professor emeritus of economics at Niagara University, told The Food Institute. “The U.S. is a much bigger country with tremendous market size and effective demand.
“The U.S. dollar is the sole global currency in the global economy. Therefore, the U.S. is able to make independent monetary policies in dealing with inflation to its advantage.”
Interest Rates’ Impact
Both the BoE and the U.S. Federal Reserve have hiked interest rates substantially in their fight against inflation, currently to 5.25%.
“By hiking interest rates, the Fed made aggregate demand lower in fighting inflation,” Lee said. “In the meantime, the dollar became stronger, caused by massive capital inflow to the U.S.
“The disruptions from the supply side caused by geopolitical tensions also helped the U.S. as oil and agricultural prices were higher for more exports.”
While the Fed contemplates standing pat – or even cutting rates by early next year, according to UBS Investment Bank prediction – the BoE may not have that luxury.
Brexit a Big Factor
“It’s true that Brexit is one of the drivers of labor shortages, which have kept unemployment low and wage growth at near-record levels,” said Oliver Rust, head of product at independent inflation data aggregator Truflation.
“However, the COVID-19 pandemic also played a part here, causing a sharp uptick in ‘economically inactive’ people due to long-term sickness.”
He added that we’re also seeing a demographic shift, with data from the Office for National Statistics pointing to a rise in early retirement. A tight labor market tends to particularly affect the services industry, which accounted for some 79% of U.K. gross domestic product and 83% of employment in Q2 2023. In the U.S., the figures were 77.6% and 79.15%, respectively.
Rust said grain and vegetable shortages, extreme weather and upward pressure on oil and gas, exacerbated by the war in Ukraine, also are factors in U.K. inflation.
“In addition, the U.K. introduced energy price caps later than the EU, which are now beginning to come through in the inflation numbers,” Rust noted.
So, what can Britain do to further tame inflation without sending the economy into a severe recession?
Lee suggested cutting government expenditures, raising taxes and restricting imports.
“It would be painful for its economy and there would be no easy solutions,” Lee said.