European Inflation Falls Faster Than UK

Several analyses have looked at levels of inflation both within the UK and eurozone and discussed the main differences between them. Currently, inflation in Europe is much lower than it is in the UK. What have been the causes of this stubbornly high inflation?

At the end of June, inflation in Europe dropped to 5.5%, which was more than experts were predicting. The cost of energy went down and consumer prices reduced from 6.1% in May. Eurostat put most of the drop in inflation to falling energy prices. It dropped 5.6% year on year in June, compared to 1.8% in May.

Despite energy becoming cheaper in the eurozone, food inflation was still high at 11.7%, but down from 12.5% experienced in May. Households are still struggling with the cost of living as their food shops are stretched. Food inflation in Britain was at 16.5% in June, highlighting just one of the differences in inflationary pressures.

In the UK, however, root inflation was at 8.7% in May, which was the highest of any G7 country. If conditions worsen, the Bank of England could potentially increase the interest rate to 6% in an attempt to calm markets and batter household budgets even more. Edison Group, a research and investment group, discovered that the UK economy grew at the slowest rate in quarter 1 of 2023. Germany was the only country that performed worse as it is in a recession.

The analysis from Edison Group points the blame towards Brexit and the Energy Price Guarantee. A massive shortage in labour has set in after Brexit and, coupled with government intervention for the energy crisis, has resulted in increasingly stubborn inflation levels. As a way to counteract labour shortages, some companies raised wages to attract more staff, which has caused inflationary pressures.

Europe didn’t have similar safety nets with energy prices like the UK did. When the Energy Price Guarantee was operating, it put a limit of the amount companies could charge for a unit of energy. Since the start of July, energy prices are now dictated by regulator Ofgem. Because the eurozone operated differently, their inflation levels are showing signs of decline in line with the price of wholesale gas and electricity.

Britain is mainly a services driven economy, relying more on labour than it does with manufacturing. Even with Germany in recession, a better balance of manufacturing and services has allowed Europe to feel the effects of lower levels of inflation. As Brexit rules have tightened migration and removed free movement entirely, employers struggling to recruit have highlighted this as one of the main issues they now have to contend with.

James Smith, economist at ING, a Dutch bank, believes a sharp fall is expected within the UK. While he realises that countries have been tackling the energy crisis differently, he predicts a 20% fall in energy prices will come this month. Even though prices were quick to rise and affect consumers, decreases are coming. Smith also predicts that the gap between the UK and eurozone will be much less by the end of the summer.