UK records western Europe's highest inflation as March fall disappoints
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[April 19, 2023] By
Andy Bruce and David Milliken
LONDON (Reuters) - Britain was the only country in western Europe with
double-digit inflation in March after it fell less than expected,
official data showed on Wednesday, bolstering bets that the Bank of
England will raise interest rates again in May.
Consumer price inflation (CPI) dropped to an annual rate of 10.1%, the
Office for National Statistics (ONS) said, down from 10.4% in February
but well above the 9.8% forecast by economists polled by Reuters and the
9.2% predicted by the BoE in February.
Inflation, which hit a 41-year high of 11.1% in October, continued to
eat into the spending power of workers whose pay is rising by less.
Prices for food and non-alcoholic drinks were 19.1% higher in March than
a year earlier - the biggest such increase since August 1977 - which the
ONS said reflected higher costs for biscuits and cakes, and to a lesser
extent chocolate and fruit. Milk and sugar cost around 40% more than a
year ago.
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Britain's headline inflation rate is now the highest in western Europe
and compares with an average of 6.9% in the euro zone and 5.0% in the
United States. Austria recorded a higher inflation rate than Britain in
February.
The reading underlined expectations that Britain will suffer high
inflation for longer than its peers due to its reliance on natural gas
for heating and electricity, and the structure of government subsidies
that smoothed out price changes.
The Bank of England also worries that high inflation might lead to a
lasting upward shift in wage demands and businesses' pricing strategies,
exacerbated by a post-pandemic reduction in its labour force and trade
and labour market frictions caused by Brexit.
Core inflation - which strips out volatile energy and food prices -
failed to fall as expected and instead held at 6.2%, while services
inflation - which the BoE views as a proxy for domestic price pressures
- held at 6.6%.
"It's now clear the UK has an inflation problem that is worse and more
persistent than in Europe and the U.S.," said Ed Monk, associate
director of personal investing at asset manager Fidelity International.
"Price rises here are proving more difficult to neutralise and the Bank
of England will almost certainly add at least one more quarter-point
hike to borrowing costs."
Earlier this month, the BoE's chief economist, Huw Pill, said the
central bank still needed to "see the job through" on monetary policy
tightening, though he saw some signs of falling inflation pressures.
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![](../images/041923PIX/busine38.jpg)
A person carries a box of tomatoes
during early morning business hours at New Covent Garden Market in
London, Britain, March 9, 2023. REUTERS/Henry Nicholls
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Investors now fully price in a quarter-point interest rate rise to
4.25% on May 11 after the BoE's next meeting - up from an 80% chance
on Tuesday - and expect rates to peak at 5% by September, according
to futures markets.
Sterling initially rallied on the data, before falling back, while
the prices of two- and five-year British government bonds fell to
their lowest since early March.
POLITICAL PRESSURE
High inflation is a problem for Britain's government as well as the
BoE, which forecast in February that inflation would be below 4% by
the end of the year. Prime Minister Rishi Sunak promised at the
start of 2023 to halve inflation, which would require it to fall to
around 5% by the end of the year.
"These figures reaffirm exactly why we must continue with our
efforts to drive down inflation so we can ease pressure on families
and businesses," finance minister Jeremy Hunt said.
Inflation has also spurred a wave of industrial action in the public
sector, most recently among junior doctors who want a 35% pay rise
to compensate for more than a decade of pay not keeping up with
their preferred inflation gauge.
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Last week the International Monetary Fund forecast that inflation
would average 6.8% in Britain this year - the highest of any major
advanced economy, though not much above the rate of 6.2% forecast
for Germany.
CPI has regularly surprised on the upside in Britain, although the
BoE and most economists remain confident that it will begin to fall
sharply from the current quarter, as last year's big energy price
rises following Russia's invasion of Ukraine drop out of annual
comparisons.
"Wholesale gas prices are 60% down on a year ago, while the price of
oil is down by 30%, which should drive a further moderation in
inflation over the coming months," said Yael Selfin, chief economist
at KPMG UK.
Producer price inflation - which measures changes in prices charged
and paid by manufacturers and often leads changes in CPI - tumbled
in March due to lower oil prices.
Producer output prices rose by the smallest amount since October
2021, up 8.7% on the year after an 11.9% rise in February, while raw
material costs rose 7.6%, the smallest increase since March 2021.
(Reporting by Andy Bruce and David Milliken; editing by William
James, John Stonestreet and Alex Richardson)
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