Aug 16, 2023 - Economy

The U.K.'s grim inflation problem

Cyclists wait at a junction in front of the Bank of England in London. Photo: Hollie Adams/Bloomberg via Getty Images

A run of encouraging data shows the U.S. is on track to cure its inflation problem. The same cannot be said for the U.K., where inflation is proving stubborn.

Why it matters: Policymakers have warned about dreaded outcomes that would make inflation difficult to stamp out, including sticky service sector price gains and rapid pay increases.

  • Those scenarios look to be playing out in the U.K., despite the central bank's aggressive actions.

What's new: The headline annual inflation rate was 6.8% in July, down from the 7.9% the prior month — a dramatic decline that "principally reflected" plummeting energy prices, the government said.

  • But the core measure that excludes energy, food and other volatile categories remained stubbornly high, at 6.9%. That is down slightly from the 7.1% reached in May, the peak since the nation's pandemic-era inflation burst.

What they're saying: "[T]oday's high core figures will have the hawks at the Bank of England crowing for more policy action," Jamie Dutta, an analyst at online broker Vantage, wrote in a note.

Details: Perhaps most worrisome were developments in the services sector — on the radar of global central bankers because price gains there can be difficult to stamp out.

  • That's increasingly proving to be the case in the U.K.: Service sector inflation rose by 7.4% in the year through July — reaccelerating to the highest rate in more than 30 years. Higher prices for hotels and airfare underscored still-strong consumer demand.

The backdrop: Separate data earlier this week showed U.K. wages grew 7.8% in the second quarter compared to the same period a year ago, the quickest annual rate since the government started tracking the data in 2001.

  • Policymakers worldwide have warned about the risk of a wage-price spiral — a difficult-to-break cycle in which higher prices push workers to demand higher wages, in turn fueling higher inflation, and so on.
  • That has looked increasingly likely where the U.K.'s tight labor markets and rapid pay increases have been influenced by pandemic-era dynamics and Brexit.
  • It's a positive development for workers there, who are seeking real wage gains in the face of a crushing cost-of-living crisis. That's in contrast to dynamics in the U.S., where workers are finally seeing real wage gains because of slower inflation.

The bottom line: The Bank of England is expected to raise rates for the 15th consecutive time since late 2021 next month, continuing efforts to cool an economy where inflation remains the highest of any major developed nation.

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