UK Inflation Highest In G7 – What's The Cause?
The inflation rate in the UK has soared to one of the highest levels since the early 1980s. In April, gas and electricity bills rose by an unprecedented amount, leading to a record increase in inflation. Now at 9%, it is above the 8.3% rate in the US and Germany’s 7.4%. Japan’s economy is characterized by low inflation and a relatively young population, contributing to the country’s low inflation rate of 1.2%.
Here are some reasons why UK consumer prices have risen faster than other major economies
UK gas prices remain high despite falling back from record levels.
Italy’s government is spending €8 billion to shield consumers from higher bills, while Spain and Portugal capped gas prices after winning EU approval. Germany has cut fuel tax by 30 cents per litre, compared with Britain’s 5 pence cut. Ireland has cut public transport fares by 20%, while Spain and Belgium have cut VAT on energy bills—something Boris Johnson claimed could be done after Brexit but has failed to be enacted.
The UK government announced £22 billion of support for high energy costs in the current financial year, including cuts to fuel duty and a council tax rebate, as well as repayable loans on energy bills. However, this does not affect the headline inflation rate.
Labour says the UK is the only country in the G7 where the government is increasing taxes to pay for a cost of living crisis after Chancellor of the Exchequer Rishi Sunak announced an increase in national insurance contributions last month.
Energy
Because Britain is a net energy importer, which means it is exposed to global price shocks. The surge in oil prices that has occurred since Russia started fighting in Ukraine is no exception. However, other countries have done more in response to the price rise.
France has a 4% cap on electricity price rises, helped by state ownership of the energy producer EDF. The country also sources most of its energy needs from nuclear power plants.
Brexit and a slump in the pound
Britain is an open economy with total trade equivalent to 60% of GDP. The UK’s manufacturing base is also smaller than many other advanced economies, such as Germany and Italy.
The rise of pandemic-related disruption and China’s “zero Covid” policy have pushed up freight prices, causing costly delays. However, companies in Britain face additional costs from Brexit, with reams of paperwork and border delays adding to the pressure.
The pound has remained weak against the dollar since the EU referendum in 2016
The rise of pandemic-related disruption and China’s “zero Covid” policy have pushed up freight prices, causing costly delays. However, companies in Britain face additional costs from Brexit, with reams of paperwork and border delays adding to the pressure.
The EU is a significant contributor to food supplies in Britain, accounting for over half of total imports. While most foods consumed in Britain are produced domestically, including the majority of grains, meat, dairy and eggs, much comes from the EU.
The thinktank UK in a Changing Europe estimated that food prices could rise by 6% between December 2019 and September 2021 due to trade barriers after Brexit.
The pound has fallen in recent months, reaching its lowest level against the US dollar since the early days of the pandemic. This will increase inflation by driving up the cost of imports.
Worker shortages
The number of foreign workers looking for jobs in the UK has dropped since Brexit, while many older people left the workforce during the pandemic. Labour shortages lead companies to increase pay, increase their wage bills, and raise prices.
Growth in actual pay has lagged behind the surge in inflation.
The Bank of England believes that inflation in Britain is higher than in the EU, where wage growth reached 1.6% in the final quarter of 2021. However, it is less pronounced than in the United States, where one measure of wage growth reached 6% in March.
However, average pay has been slow to keep pace with the soaring cost of living.
