- Britain has been left behind as the only major economy in the world experiencing higher inflation rates over time.
- Rates hikes are ongoing in the U.K. with no end in sight, but inflation remains relatively high.
- OECD report for June 4, 2023, indicates that inflation fell to 4.6% among G7 members in May, with Britain being the outlier
Britain keeps experiencing increased economic pressure as inflation levels remain higher than its competing economies despite numerous rate hikes. The country is expected to endure a longer period of tough markets owing to interest rate hikes to tame inflation for the better part of the year.
Britain’s government and central bank set on a collision course in inflation rates blame game
The British government and the Bank of England are set on a collision course now regarding the taming of inflation rates as the country keeps experiencing higher rates than the surrounding regions.
A Tuesday report from the Organization for Economic Cooperation and Development (OECD) shows that the G7 nations had a combined inflation rate of 4.6% in May, down from 5.4% in April, which is also its lowest level since September 2021
Comparatively, Britain lags with a CPI of 8.7%, almost double what its compatriots post. The country is also under more pressure as the economic growth has stagnated, and the public debt surpassed 100% of the GDP for the first time since March 1961.
At the same time, markets are tense about further interest rate hikes that are necessary for the fight against the spiking inflation rates. However, it still seems more difficult for the Bank of England to pull off a 2% inflation rate target by the end of 2023 without plunging the economy into a recession.
In January, U.K. Prime Minister Rishi Sunak vowed to halve the inflation rates in the country by half by the end of the year. If he is to deliver this pledge, the markets would have to brace for more pain as the housing sector is already under mayhem. Over 2 million households can now barely pay their mortgages, with June’s 50 basis points hike in interest rates feared to have pushed the numbers higher.
However, the Bank of England has indicated that the labor market is still strong. At a monetary policy forum in Sintra Portugal, Bailey noted that the U.K. labor is unique in remaining below the pre-Covid levels.
“I see this when I go around the country talking to firms. They say to me frequently that their plan is to retain labor as much as they can, even in the event of a downturn, because they’ve been concerned, and it’s been difficult to recruit labor,” he said.
However, Bailey denied that Brexit was to blame for the economic constraints that Britain is enduring. The Bank of England had, however, indicated that England’s productivity would have a long-run drop of 3% due to Brexit. In connection to the story, Catherine Mann recently told a parliamentary committee that additional paperwork was to blame for smothering small firms and driving inflation up.
“It’s not just small firms in the U.K. who want to export, but it is also small firms in Europe who were suppliers and provided competition in the U.K. market, so there is an inflationary effect coming through the competition channel,” she added.
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