Last week the Office for National Statistics (ONS) published its latest data for UK inflation. The data showed inflation remained in double digits in March with annual price rises of 10.1 per cent. Economists had expected inflation to now be below 10 per cent because of the way it is calculated. Inflation is calculated as the annual rate of change for an average basket of goods and services, and the initial surge in energy prices after the war in Ukraine started a year ago would drop from out of the calculations. This was highlighted in March by changes at the petrol station: average petrol prices had surged between February and March 2022 (at their fastest monthly rate since 1990) but had fallen over the same period in 2023.
Although petrol and diesel prices fell, further sharp rises in the costs of food left inflation higher than anticipated. Food prices rose 19.2 per cent in the year to March, the fastest increase in food prices in over 45 years!
The UK has an inflation problem. While UK inflation is still above 10 per cent, it is 7.4 per cent in Germany, 5.6 per cent in France, and under 5.0 per cent in the US. All these countries experienced the same macroeconomic shock from the covid pandemic and energy spikes, but each is now undergoing markedly different levels of inflation.
To be fair all economies behave and react differently. Germany has an enormous exporting sector and an instinctive hatred of inflation that goes back to the 1920s. France is a protectionist and interventionist state; it really helps keep inflation down if the government can just order state-run industry to take the hit and not pass higher prices on to the consumer. The US is a remarkably dynamic, competitive, and innovative country, which helps keep prices low.
Not only does inflation differ across countries, but it can also differ within a country. Everyone’s experience of inflation is different. When prices change quickly, poorer households are hit hardest. In the current economic climate, the reason for this is simple: energy and food prices are driving inflation, and people on low incomes must spend a larger proportion of their income to heat their homes and put food on the table. In 2022, the average (median) weekly earnings in North Wales were 9 per cent lower than that for the UK, implying that people living in the region will feel the pain of higher prices much more than other parts of the country.
The Bank of England's current predictions are that inflation will begin to fall from the middle of this year and be around 4 per cent by the end of the year. However, a drop in inflation does not necessarily mean that prices will fall – it just means that the annualised rate of growth is not quite as fast as it had been in the previous month. Inflation may start coming down over the next few months but higher prices, and the misery and pain they bring, could be with us for a while longer.