The U.K.’s Inflation Problem

Earlier this month, we performed a dissection of eurozone inflation. On the back of another upside surprise in this week’s U.K. inflation report, we thought it would be appropriate to explore why inflation remains higher in Britain than in any other major developed market.

81% of the basket used to measure British inflation is seeing prices increase by more than 4% annualized in the past six months. Due to Britain’s reliance on imported natural gas for heating and electricity, energy has been a major contributor to inflation. Happily, these costs are now receding.

Even though global food price indices have been trending lower, there is no relief for British households. Brexit has added to delivery times and costs for British imports, an aspect that appears to have been passed on to households. The scarcity and rising cost of vegetables like tomatoes is only partly due to unseasonably cold weather in parts of Spain and Morocco. But there were no severe shortages or empty shelves in major European markets. According to the London School of Economics, Brexit trade barriers contributed 8 percentage points of the 25% increase in food prices between 2019 and March 2023.