The fact that Britain is the only significant advanced economy with double-digit inflation is an unfortunate sign of the tremendous economic problems the nation is currently experiencing.

According to figures released on Wednesday, annual consumer price inflation (CPI) in Britain decreased to 10.1% last month despite expectations for a larger decline from February’s 10.4%.

The data highlighted the possibility that Britain may experience high inflation for a longer period of time than other comparable economies due to its reliance on natural gas for electricity and heating as well as the design of state subsidies to moderate price swings.

The Bank of England is concerned that rising inflation may result in a long-term rise in pay demands and pricing strategies for businesses, which would be made worse by a post-pandemic decline in the labor force and issues with trade and the jobs market brought on by Brexit.

In Britain, five pounds ($6.21) today only buys as much as four pounds did in 2019, an unprecedented rate of inflation compared to other Western European nations during the same time span.

“Inflation in the UK has risen further and stayed higher than elsewhere as the UK has experienced the worst of both worlds: a big energy shock like the euro zone and labour shortages – even worse than the U.S.,” said Ruth Gregory, deputy chief UK economist at consultancy Capital Economics.

Last Monday, the International Monetary Fund predicted that this year, British inflation would average 6.8%, the highest of any significant advanced country, but only slightly higher than Germany’s 6.2% prediction.

The story has a lot to do with energy.

The largest increase in western Europe was seen in the UK, where consumer energy prices were 79% higher in March than they were two years prior.

“The overarching difference that stands out is one of timing of energy support. It’s clear this is having a massive impact,” said Sandra Horsfield, an economist at Investec.

Comparisons have been made more challenging by different ways of calculating energy costs and the variety of state subsidies available to help consumers cope with rising prices since Russia’s invasion of Ukraine, but experts maintain that Britain has been severely impacted.

The high rate of energy inflation in Britain is a result of both the country’s inadequate energy-efficient housing stock and its strong reliance on gas for home heating and power generating.

Nevertheless, when the price increase from last year starts to disappear from the annual comparison, energy inflation in Britain is likely to follow the euro zone and fall dramatically starting in April.

The rate of fall in headline inflation, however, is expected to be slowed by price pressures generated domestically.

Only Austria in western Europe had a higher rate of increase in consumer service prices, which central bankers constantly monitor as a sign of domestic pricing pressures, often from wages. Prices grew by 6.6% in the year to March.

Although the UK traditionally has greater service inflation than the euro zone, this gap has widened recently, with economists blaming the tight labor market.

The pool of employees has been reduced by an increase in early retirement, chronic sickness, and migratory patterns, therefore Britain’s labor market has taken longer to recover from the epidemic than its peers abroad.

“Supply is weak because of Brexit and workforce sickness. We do not expect those chronic supply problems to ease in the near-term,” Bank of America economist Robert Wood said in a research note.

(Adapted from Reuters.com)

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