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Why is UK inflation the highest in the G7 and why is Brexit a factor? | inflation

Why is UK inflation the highest in the G7 and why is Brexit a factor?  |  inflation


The UK has the highest inflation rate among the G7 countries and is the only country in the group of developed countries to post double-digit figures after shock increases over the past few months.

With Britain appearing to be an outlier internationally, some economists have suggested that Brexit is having an impact.

international comparison

Based on headlines, inflation is higher in the UK than elsewhere. Eurozone annual inflation slowed to 8.5% in February, down from a peak of 10.6% in October, while inflation in the US eased to 6% last month from a peak of 9.1% last summer.

However, it is not a completely uniform picture. Inflation rose in France and Germany over the past month, while inflation in the EU27 fell slightly to 9.9% from 10%. Analysts in the eurozone expected a larger decline, from 8.6% in January to 8.2%. However, pressure from rising food prices, the same culprit for the shock surge in the UK, led to a small, unexpected decline.

Core inflation used by central banks in both the UK and the Eurozone, excluding energy and food, provides a clearer picture of underlying pressures, rising more than expected in the UK from 5.8% in January to 6.2% in February. Eurozone is 5.3% to 5.6%.

There are also characteristics of the economy that can cause inflation to rise or fall that may not be repeated in other countries. Ofgem’s price cap in the UK is an example of leading to a cliff edge for energy price changes. Economists expect the UK inflation rate to fall sharply in April for these reasons, compared to a 54% jump from the Ofgem cap 12 months ago.

While inflation could spike month-to-month, defying overall trends and making it difficult to isolate Brexit as a driving force, there are still reasons why the UK could be worse off than the rest of the world.

A supermarket in Düsseldorf, Germany. Inflation rose in France and Germany over the past month. Photo: Ina Fassbender/AFP/Getty ImagesSupply chains

Brexit has added shipping time and cost for UK imports, a factor that stores will likely pass on to consumers.

Part of the inflation shock in February was due to higher prices for cucumbers, tomatoes and salads last month as severe shortages and rationing drove prices across the UK. Experts blamed the shortage as unseasonably cold weather in southern Spain and Morocco affected harvests, but others pointed to Brexit given the lack of empty shelves in EU countries.

Justin King, former CEO of Sainsburys, said the UK food sector was hit hard by leaving the EU and warned producers on the block had delayed delivery orders when the UK was in short supply.

According to a study by the London School of Economics, Brexit has added nearly $6 billion to the UK food bill in the two years to the end of 2021.

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But there are also domestic circumstances. Growers criticize the government’s approach to lowering prices paid by Britain’s powerful supermarkets, limiting supply and subsidizing food production. Economists also say skyrocketing energy prices are the biggest driver of food costs, given their impact on everything from fertilizer, tractor diesel and truck shipments to keeping bakery ovens running and food factory production lines running.

British supermarkets ran out of cucumbers, tomatoes and salads, causing prices to rise. Photo: Matthew Horwood/Getty Images Worker shortage

In addition to supply chain disruptions and energy costs, wages also have an impact. In response to inflationary shocks, workers are demanding higher wage agreements from their employers, and in many sectors of the economy there are shortages of available workers, forcing companies to offer higher wages to recruit or retain workers.

Tighter post-Brexit migration rules could add to the problem in generally low-paying, low-skilled roles, particularly in sectors such as hospitality, where employers have been able to rely more heavily on EU workers coming to the UK.

Net immigration to the UK has continued to rise at record levels since Brexit, driven by arrivals from non-EU countries that make up the decline in immigration from the bloc of 27 countries.

But a study by the Center for European Reform and the UK in a Changing Europe found that Brexit could still leave the UK labor force short of 330,000 jobs after considering what the workforce would look like had it remained in the EU. .

With older workers leaving the labor market completely and record levels of long-term illness among the UK working-age population, there will be a shortage of staff to fill near-record job vacancies, forcing employers to raise wages, which will likely further fuel inflation. can.




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