Persistent Inflation in the UK: Factors and Implications

Despite a slight drop in March, the United Kingdom remains burdened with double-digit inflation, a situation not experienced by other countries in Western Europe. The consumer price index (CPI) measure of inflation fell to 10.1 percent in March from 10.4 percent in February. Analysts had anticipated a more substantial decrease to 9.8 percent.

In comparison, the eurozone’s inflation rate eased to 6.9 percent in March, down from 8.5 percent in February. This marked the sixth consecutive month of decline in the region. The main components of inflation were food, alcohol, and tobacco, peaking at 15.5 percent, and energy prices, which dropped by 0.9 percent year-on-year.

Driving Factors of UK Inflation

The ongoing inflationary pressure in the UK is driven primarily by rising commodity prices, including food, since the onset of the COVID-19 pandemic. The global supply chain has been strained, crops have rotted, and panic buying in supermarkets has contributed to higher costs. Additionally, the conflict in Ukraine and subsequent reduction in Russian natural gas supply to Europe have exacerbated the issue. Prior to the conflict, Russia supplied around 40 percent of Europe’s natural gas needs.

Potential interest rate hikes

The Bank of England has already raised interest rates eleven times in a row to 4.25 percent in an attempt to control inflation. However, analysts believe that the central bank may implement further hikes in the coming months, potentially pushing interest rates towards 5 percent. This could have significant implications for both businesses and consumers.

Comparing UK and Eurozone Approaches

While the UK grapples with persistent inflation, the European Central Bank (ECB) has been increasing borrowing costs in response to the eurozone’s fluctuating inflation rates. In March, the ECB raised its main rate by half a percentage point to 3.5 percent. With energy bills soaring across Europe, countries are exploring various methods to help citizens cope with the financial burden.