UK inflation now among highest in Europe: cost of living crisis

I have penned plenty of reports into the UK economy over the last few months. It’s been a wild ride for the nation, none more so than last October, when ex-prime minster Lizz Truss’ disastrous budget nearly bankrupted the country (deep dive on that debacle here). 

Yet while the rest of the world has at least made progress, it feels like the UK is still mired in an economic quagmire. Nothing is more evident of this than the inflation rate, which is still stubbornly in the double digits. 

With the March inflation number coming in at 10.1%, the cost-of-living crisis refuses to ease. 

The word crisis is overused shamelessly in economics, but make no mistake about it, the cost-of-living crisis in the UK is exactly that. 

It is made worse when compared to other countries around Europe. While the region has been rocked by inflation this past year, through a combination of the Ukraine war, injected liquidity during the pandemic and supply chain issues, the price rises have eased off in recent months for most nations. 

Not for the UK, however, which is still in the double digits and now among the worst in Western Europe. 

Inflation does not punish equally

Huw Pill, chief economist of the Bank of England, said last week that the UK “needs to accept that they’re worse off”, a comment which understandably hit a nerve for a lot of the population. 

“You don’t need to be much of an economist to realise that if what you’re buying has gone up relative to what you’re selling, you’re going to be worse off”, he said, referencing the impact of hiked energy costs, with the UK a large importer of natural gas. 

For some, the situation is worse than the figures convey, with many decrying that the impact on the ground is far worse than official measures. This gets to the heart of the issue, and what I have written about so extensively over the last year: inflation is such a pernicious problem because it affects the poor more than the rich. 

Those at the bottom do not have assets to protect themselves. While risk assets fell back during 2022, the pandemic price boom saw meteoric gains. Not only that, but the UK-based FTSE 100 is close to all-time highs (deep dive on that here). A weakened pound (75% of revenues are sourced from abroad) and surging energy prices (the index is commodity-heavy and lacks tech stocks)  have been kind.

Asset owners have thus been insulated through price rises over the past few years, while they also spend a lower portion of their income on items such as food and energy, which have been particularly punitive. Then there is housing. Even with some softness over the last quarter, housing has gone bananas in the past few years, widening the gap between renters and homeowners. 

CPI criticised a measure of inflation

There is also the issue of the measurement itself, CPI, which some deem as being misrepresentative. 

I wrote a piece on this debate last year. In short, the CPI is calculated by assessing the price of a basket of goods and services from one period to another. This means it measures the eroding purchasing power of one dollar (or pound in this case), instead of one person. High-income individuals spend more, meaning they bear a greater weight on the index. 

Therefore, each dollar casts a vote, instead of each person, and this can contribute to feelings that the index is unrepresentative for certain demographics. 

One example of an alternate measure is via the company Truflation, which says it takes “millions of data points” compared to the UK’s Office for National Statistics approach, which used only “hundreds of thousands”. 

It currently has the inflation rate in the UK at 15.5%, well north of the official 10.1%. 

“The biggest influence (on the difference in inflation figures) is the housing category. This is where our number is at a higher level than the ONS, and is because our data includes mortgage repayments. In recent months the housing category has experienced a cooling off in terms of the rate of increases vs a year ago”, said Oliver Rust, Head of Product. 

What next for the UK?

Whatever way you swing it, inflation is extraordinarily high and many in the UK are hurting. 

On the positive side, it finally feels like things are at least beginning to plateau. Inflation is still high, but there is growing optimism that at least it may have peaked and will soon follow the rest of Europe in coming back down. Having said that, the rate is so far north of the conventional 2% target of central banks that the tough times won’t be going anywhere soon. 

On the political front, Rishi Sunak is six months into the job now, with the chaos of Lizz Truss’ 49-day reign and catastrophic budget finally in the rearview window. Things are at least a bit more stable, and the rest of Europe, as well as the US, have had a relatively positive quarter when looking at most economic metrics. 

Yet the UK is no longer part of the EU, and it is feeling the brunt of going up against the bloc and the US individually. It is a large economy, but nowhere near as powerful as the US, and it has felt the squeeze as it adapts to a post-Brexit world. 

The energy crisis, with the UK such a high importer, hit it hard, and it has become extremely clear that the UK’s decision to flee Europe was, in economic terms at least, a huge setback. Going forward, things can only improve, as the nation flails around trying to find its place in the new economic order. But the fix isn’t easy, and it won’t be quick.

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