England’s inflation test continues despite highest interest rate in 15 years

Inflation, which has stalled due to the stronger-than-expected performance of the economy and low unemployment in the UK, also strengthens expectations that the Bank of England (BoE) will continue to raise interest rates.

Although the country’s high dependence on food and natural gas suppresses the fall in inflation despite interest rate hikes, the country stands out as having the highest inflation rate among developed countries.

Annual inflation held steady at 8.7 percent in May, according to the UK’s Office for National Statistics (ONS). The expectation was that inflation would be 8.4 percent due to falling energy prices.

The country’s subjacent inflation, for its part, increased for two consecutive months, going from 6.8 percent in April to 7.1 percent in May.

CORE INFLATION AT THE HIGHEST LEVEL IN 31 YEARS

Thus, underlying inflation, which excludes variable elements such as energy and food, reached its highest level in 31 years. Service sector inflation, one of the most important indicators the BoE takes into account in its monetary policy decisions, rose to 7.4 percent in May.

Food inflation, which is one of the items that contributed to the persistence of general inflation, fell to 18.4 percent in May, after reaching the highest level in the last 46 years with 19.2 percent. .

The BoE, which has been implementing a tight monetary policy since December 2021 as part of the fight against inflation, raised the policy rate to 5 percent yesterday, “partly surprising” markets, after inflation failed. went down as expected.

Interest rates hit their highest level since 2008 after the BoE raised interest rates for the 13th time in a row.

The fact that core inflation continues to rise is considered a sign that inflation will continue to be persistent in the coming months and therefore new interest rate rises. The BoE, which needs more interest rate increases for its 2 percent inflation target, is expected to raise interest rates to 6 percent starting in December 2023.

COUNTRY WITH THE HIGHEST INFLATION AMONG G7

The 8.7 percent inflation rate in May made England the country with the highest inflation among the G7 countries. The UK also has the highest food inflation in Western Europe at 18.4 percent.

While inflation in the US was 4 percent in May, 6.1 percent in Germany and 5.1 percent in France, it was 3.5 percent in Japan in April.

Last week, the US Federal Reserve (Fed) kept the policy rate unchanged in the 5-5.25 percent range, as expected. The European Central Bank, for its part, increased the three main policy rates by 25 basis points, raising the refinancing rate to 4 percent, the deposit rate to 3.50 percent, and the marginal financing rate to 4. 2.5 percent.

THE ENERGY IMPORT BILL INCREASED 129.4 PERCENT

The main reasons behind persistently high inflation in the UK compared to other G7 countries are the UK’s reliance on food and natural gas imports, as well as rising post-Brexit costs, low unemployment and stronger-than-expected economic performance. and monetary policy.

According to data from the Food and Agriculture Organization of the United Nations (FAO), England, an island country, is the third largest net importer of food and drink after China and Japan, while high import dependency exposes the country to increases in food prices and supply interruptions.

In addition, the UK’s high dependence on natural gas imports for electricity generation and heating makes the country vulnerable to price changes in this area.

After record prices on international energy markets, the UK’s energy import bill crossed the £100bn threshold for the first time last year, reaching £117bn. This figure was £54 billion in 2021 and £48 billion in 2019, the run-up to the pandemic.

Crude oil and petroleum products accounted for £63bn of Britain’s energy import bill last year, and gas imports £49bn. The UK got 43 per cent of its electricity production from natural gas last year.

Britain, which was one of the countries hardest hit by the sharp rise in natural gas prices last year, is expected to increase its natural gas imports by 70 percent by 2030.

BREXIT AND OTHER PRESSURES

After the UK decided to leave the European Union (EU) in 2016, it left the EU single market from 2021. Although the UK has an agreement with the EU that allows for a high degree of trade in goods free of taxes, barriers have been seen in the form of paperwork that cause delays and higher costs in exports and imports.

Employees in the UK, where there is a post-Brexit shortage of workers, go on strike over refusal to accept a below-inflation pay rise. Employee wages in the UK rose 7.2 percent in the January-April period this year, the fastest rise in 20 years.

The end of the free movement of workers from EU countries has contributed to the staff shortages faced by many employers, which has been more severe in the UK than in many other economies, driving up wages and ultimately prices for consumers.

LOW UNEMPLOYMENT EFFECT

In a statement following yesterday’s rate decision, BoE Chairman Andrew Bailey said that current wage increases in the fight against inflation cannot continue and that these levels of increase are “unsustainable”.

Stating that the economy performed stronger than expected and unemployment was low, Bailey noted that these developments kept inflation stubborn in the country.

THE GOVERNMENT WANTED PATIENCE

UK public debt topped 100 percent of its gross domestic product (GDP) in May for the first time since 1961, as the government rolled out energy and social support programs to protect consumers against high price rises.

Saying that it is inefficient to combat the effects of inflation with government aid, analysts argue that the BoE should risk a “recession” in the economy to bring inflation closer to target.

While British Prime Minister Rishi Sunak has vowed to halve the inflation rate, which was above 10 percent at the start of the year, by the end of this year, he said yesterday that it will not be easy and it will take time to bring the inflation at lower levels. this level.

Finance Minister Jeremy Hunt stated that raising interest rates will have a reducing effect on inflation, saying: “Increases in interest rates in other countries can be seen to reduce inflation over time. It will happen here too, but we must be patient and stick to our course. If we’re going to help families and ease the pressure on mortgages and businesses, we need to rid the economy of anything that causes hyperinflation.” He made the assessment of him.

Hunt also noted that the government will not hesitate to support the BoE in its efforts to reduce its inflation and will provide targeted support on the cost of living. (AA)