May 24, 2023 - Economy

Steep inflation highlights the U.K.’s post-Brexit economic misery

Data: Office for National Statistics; Chart: Axios Visuals

Inflation in the UK is not where anybody wants it to be — and this time no one can blame Liz Truss.

Why it matters: The UK economy is beginning to feel the full brunt of its exit from the European Union. Disappointing inflation numbers out this morning have driven bond yields up to crisis levels.

By the numbers: On the face of it, the inflation figures are moving in the right direction, with CPI in April coming in at 8.7% year-on-year, down from 10.1% in March. But the number was much higher than any economists had expected, given the known softening in energy prices.

  • Energy inflation in April remained high, at 12.3% year-on-year, but fell sharply from 26.7% in January and 26.1% in March.
  • Food inflation, on the other hand, is proving harder to bring down, with prices rising 19.1% over the past year — the highest level in 45 years, and a sobering reminder of the miserable late-1970s "winter of discontent."

Be smart: Core inflation, stripping out food and energy costs, was 6.8%, the highest figure since 1992. Worse, it's moving in the wrong direction, up sharply from 6.2% in March.

  • That figure has convinced markets that multiple interest rate hikes are in the cards for the rest of this year.

The big picture: Free trade in goods and labor brings down consumer prices; ending it sends them up.

  • Higher inflation means the central bank has to hike rates, which means higher mortgage costs for a nation of highly-leveraged homeowners. As a result, disposable income is going down even as prices are going up.

Where it stands: The yield on 2-year UK government bonds spiked to 4.33%, a level not seen since the "mini-budget" crisis last fall that forced former Prime Minister Liz Truss to resign after just 45 days in office.

The bottom line: High interest rates in the UK now reflect genuinely terrible fundamentals, rather than misguided fiscal policy or bond-market technical factors.

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