Persistent UK Inflation Should Worry Everyone

There is a real cost to falling behind on the battle against rising prices — one that increases over time.

All eyes on the BOE.

Source: Bloomberg

By

Mohamed A. El-Erian

21 June 2023 at 22:12 GMT+10

There was nothing but worrisome news in Wednesday’s economic data releases for the UK. And the implications extend beyond Britain in a multifaceted way.

The latest economic data shows that:

• Core inflation for May rose to 7.1%, from 6.8% in April. This exceeded the consensus forecast and constitutes the highest reading since 1992.
• Headline inflation remained stuck at 8.7%, among the highest levels in the G-20, as the drivers of consumer-price increases continued to migrate to the more stubborn components including services.
• The doubling of monthly government net borrowing pushed debt-to-GDP to 100% for the first time since 1991.

Faster Than Expected

Both UK consumer prices and core inflation excluding energy and food costs exceeded economists' forecasts for the past four months

Source: Office for National Statistics via Bloomberg

This is all concerning news, especially as it points to

• Higher borrowing costs for all — households, companies and the government.
• Greater risk of stagflation that would see disappointing growth accompany high inflation.
• Worsening of inequality that is already too high.

All this means an even more difficult set of policy challenges for the government, and a Bank of England that tomorrow has no choice but to both raise interest rates and signal more hikes to come in the midst of growing tensions in the mortgage market. It reinforces the point that the urgent goal of bringing down inflation in an orderly fashion cannot be met just through interest-rate increases. A lot more needs to be done to improve the responsiveness of the supply side, enhance productivity, improve the provision of public services, strengthen safety nets and, more generally, promote a stronger combination of agility and resilience.

The importance of doing so extends well beyond the economy. It is critical for maintaining financial stability and countering the erosion of the social fabric that comes with worsening inequality. It is also key for people’s mental health given how unsettled and uncertain families feel when faced with both eroding purchasing power due to persistent inflation and the income insecurity that accompanies struggling economic growth.

The disappointing inflation data comes after news that other central banks were either pushed back into raising interest rates after pausing (Australia and Canada) or have had to revise up their inflation forecasts and their forward policy guidance for future rate hikes (the US Federal Reserve).

Today’s UK data serves as a reminder to all that there is a real cost to falling behind in the inflation battle, and one that increases over time. It erodes the credibility of policymaking when it’s already struggling to respond to more complicated problems. And the damage it wreaks on societal wellbeing is amplified by the poorest segments being hit particularly hard.