Inflation in the UK rose unexpectedly sharply last month as the cost of living has risen faster than most of the world’s advanced economies.
Inflation rose 10.4% through February, in contrast to the US and the euro zone, where inflation eased to 6% and 8.5% respectively.
Inflation is volatile and it would be a mistake to read too much into a month’s numbers, but the UK’s inflation rate has been consistently higher on average over the past year than the US and other major European economies.
As the cost of living continues to weigh on household budgets, many are beginning to wonder: Does the UK have an inflation problem of its own?
We look at three factors driving prices up:
One of the main drivers of the rise in inflation in February was the continued increase in food prices in the UK.
Grocery inflation rose 18.2% last month compared to the same time last year, with salad and vegetable shortages causing recent cost increases for shoppers.
Tomatoes, peppers and cucumbers were some of the scarce commodities, mainly due to extreme weather conditions in Spain and North Africa affecting harvests. In the winter, the UK imports many such products from abroad.
The shortages were also exacerbated by high energy prices in the UK, which Minette Batters, President of the National Farmers Union (NFU), said resulted in vegetable growers and farmers cutting crop yields or stopping producing certain foods at all due to rising operating costs).
She says it’s a “very complex picture” but all the union’s surveys of growers show that businesses are shrinking and the more the sector shrinks “the less there is, rationing is coming and that’s just driving food inflation further.” .
Farmers have also argued that retailers and supermarkets are not paying them a fair price for their produce, and the government’s food czar said supermarkets have “fixed price contracts” with suppliers, meaning some producers choose to sell less when food is scarce are UK and more elsewhere in Europe.
Energy bills have soared around the world since Russia invaded Ukraine. However, the impact of higher gas prices in the UK has been harder on households and businesses than on their peers in other advanced economies.
Analysts say the UK is more vulnerable to a rise in wholesale gas prices.
Jonathan Haskel, a member of the Bank of England’s Monetary Policy Committee, which decides interest rates, said earlier the UK was one of the “most vulnerable” countries to energy price shocks.
He argued that Britain was a bigger consumer of gas to heat houses and turn on lights than other European countries. He added that gas is mostly transported via pipelines from a handful of suppliers, while the US produces most of its own gas and relies more on liquefied natural gas (LNG).
Lower taxes on electricity and gas paid by UK consumers compared to their European neighbors meant that if wholesale gas prices rose, UK energy bills would be ‘expected’ to rise more than others.
On the plus side, this means bills should fall faster if wholesale prices fall, as expected in the coming months.
Martin Beck, chief economic adviser to the EY Item Club, says February’s surge was a “flash in the pan”.
“Things will improve quickly – that’s bad news today,” he adds.
The energy price shock is a key reason for persistently high inflation in the UK, but it is not the only cause as the UK also has severe labor shortages.
During the pandemic, the workforce shrank in all major countries.
But while most leading economies have since recovered, there are still about 400,000 more people out of work in the UK than in December 2019.
A study by the think tanks Center for European Reform and UK in a Changing Europe suggests there are 330,000 fewer workers in the UK as a result of Brexit, with sectors such as transport, hospitality and retail being particularly hard hit.
Other reasons include young people choosing to study rather than work, older people retiring early and more people being unemployed due to long-term illnesses.
Labor shortages have helped push up wage packages as employers spend more to attract and retain employees.
Many supermarkets have given employees multiple raises as they struggle to find workers.
Bank of England Governor Andrew Baily warned workers who demanded wage increases last year, saying inflation could spiral out of control, although unions argue they are having to cope with rising living costs.
Experts still expect price increases to slow in the coming months, but if the UK continues to surprise like February and high inflation persists, more questions will arise as to why the UK is an outlier.
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