UK Inflation Holds Steady at Double-Digits: Food Prices Soar to a 45-Year High

In March, the UK grappled with a persistent annual inflation rate of 10.1%, as households continued to face skyrocketing food and energy prices. The Consumer Price Index (CPI) was above the 9.8% consensus projection in a Reuters poll of economists, making it the highest inflation rate in Western Europe. This slight decrease follows February's unexpected jump to 10.4%, which broke three consecutive months of declines since October's 41-year high of 11.1%.

The Office for National Statistics (ONS) reported that the largest upward contributions to the annual CPIH inflation rate in March 2023 came from housing and household services (principally electricity, gas, and other fuels) and food and non-alcoholic beverages. Notably, food and non-alcoholic beverages prices increased by 19.2% in the year to March 2023, the sharpest annual rise in over 45 years. This alarming increase underscores the ongoing challenges facing UK households, who must contend with soaring living costs.

UK Finance Minister Jeremy Hunt emphasized the importance of driving down inflation, stating that the government is on track to halve inflation this year. He also highlighted ongoing efforts to support households with cost-of-living measures worth an average of £3,300 per household over the current and previous years, funded through windfall taxes on energy profits.

In response to the high inflation rate, the Bank of England raised interest rates by 25 basis points to 4.25% last month. Traders are pricing a 72% probability of another quarter-point hike at the Monetary Policy Committee's (MPC) meeting on May 11. Economists predict a more significant drop in inflation in April due to the base effects of energy prices increasing in April 2022 when the UK's energy regulator lifted its price cap by 54%.

The UK economy remained flat in February, as widespread industrial action and the ongoing cost of living crisis stifled activity. Suren Thiru, economics director at ICAEW (Institute of Chartered Accountants in England and Wales), suggested that the MPC may be more divided over whether to hike interest rates further in May, as "concerns grow over a flatlining economy."

UK unemployment increased to 3.8% in the three months leading up to the end of February. Economic inactivity levels fell, and employment rates rose more than anticipated. The tight jobs market has fueled strong wage growth, which is evident in the inflation data. However, the persistent inflationary pressures are outpacing wage increases, eroding the spending power of workers.

Britain's headline March figure was the highest in Western Europe and the only one at 10% or above, with Austria recording a higher inflation rate in February. The reading highlights expectations that Britain will endure higher inflation for a more extended period than its peers. Factors contributing to this include a diminished workforce following the COVID-19 pandemic, heavy reliance on natural gas for power and heating, and trade and labor market frictions caused by Brexit.

Stabilizing energy prices are predicted to help reduce inflation over the second half of the year. However, an extended period of subdued economic growth may be necessary to rein in core price pressures, according to Hugh Gimber, global market strategist at JPMorgan Asset Management. Inflation in the services sector remained at 6.6%, while food and non-alcoholic beverages surged by 19.1%, the highest increase since 1977.

Inflation in prices charged by manufacturers fell significantly in March, reaching its lowest point since October 2021 at 8.7%, down from 11.9% in February.
This decline is primarily attributed to a drop 

in oil prices. Meanwhile, raw material costs for manufacturers were 7.6% higher than a year earlier, down from February's 12.8% increase.

The UK's inflation rate remains higher than that of its US and European counterparts, where CPI has been declining for months. In the US, prices rose by 5% in March, the slowest pace in nearly two years. In the Eurozone, CPI for the same month eased to 6.9%, the lowest since February 2022.

The Bank of England is grappling with the challenge of managing stubbornly high inflation while also addressing concerns about economic growth. Ed Monk, associate director of personal investing at asset manager Fidelity International, stated that "it's now clear the UK has an inflation problem that is worse and more persistent than in Europe and the US."

The International Monetary Fund forecasted that UK inflation would average 6.8% this year, the highest of any major advanced economy, though only slightly above Germany's projected rate of 6.2%. In March, the Bank of England anticipated that inflation would "fall significantly" in the second quarter. However, in February, it had forecasted March inflation of 9.2%.

Although inflation is likely to decrease naturally as last year's sharp energy price increases fall out of the annual comparison, the Bank of England is tasked with determining how quickly it will decline. Policymakers must carefully assess the situation, as premature claims of victory in the fight against inflation could be detrimental.

The ongoing struggle against inflation in the UK highlights the delicate balance between addressing inflationary pressures and ensuring economic growth. As households continue to grapple with soaring food and energy costs, policymakers must remain vigilant and prepared to take decisive action when necessary to ensure the wellbeing of the UK economy and its citizens.