After COVID-19, the inflation rate has been slowing in most advanced countries, but the United Kingdom continues to struggle with high inflation. The Consumer Price Index (CPI) in the UK, which once soared to 11.1%, seemed to calm down to 2.6% due to interest rate hikes by the Bank of England (BOE), but recently it has bounced back and has yet to stabilize.
On the 27th (local time), Bloomberg News analyzed that “the UK is facing 'sticky inflation' due to a surge in consumption after COVID-19, supply chain disruptions, and rising energy prices.” Last month, the UK's inflation rate was 3.5%, much higher than other major European countries such as France (0.9%) and Germany (2.2%).
In particular, energy costs are cited as a key factor driving inflation. The UK, which has a high dependency on natural gas imports, has been hit hard by the skyrocketing energy prices that surged after the war in Ukraine. Moreover, the UK applies a 'marginal pricing system' that sets electricity prices based on the cost of production from the most expensive power plants, rather than the average total generation cost, leading to a direct correlation between rising gas prices and increases in electricity rates.
The labor market is also fueling inflation. Following COVID-19, a shortage of labor and union demands for wage increases have led the regular wage growth rate in the first quarter to record 5.6%, significantly exceeding the BOE's target (3% to 3.5%). Over the past three years, the minimum wage has increased by 9.7%, 9.8%, and 6.7%, respectively, sustaining wage pressure.
Alongside, stagnant productivity has also been pointed out as a problem. Despite rising wages, productivity per worker in the UK actually decreased by 0.7% in the first quarter, falling below Germany, France, and the United States among the Group of Seven (G7) countries, and similar to levels in Italy and Canada. Experts analyze that the lack of public and private investment since the 2008 financial crisis has led to long-term stagnation in productivity.
The aftereffects of Brexit cannot be ignored. According to a study by the London School of Economics (LSE), from the end of 2019 to March 2023, about £7 billion (approximately 13 trillion won) in additional government expenditure occurred due to increased border costs from Brexit, which in turn played a major role in driving up food prices.
Amid these structural factors, lower-income groups are suffering more. Due to the high proportion of spending on essential consumer goods and the characteristics of the UK's financial system, which frequently readjusts lending conditions, they are more sensitive to interest rate hikes. Although the UK base rate has been reduced four times since August of last year to the current 4.25%, this is relatively slow compared to seven reductions in the Eurozone (4.0% → 2.25%).
However, some optimistic forecasts have been raised. The BOE believes that the current level of interest rates is effective in suppressing inflation and anticipates that it could stabilize inflation in the 2% range by early 2027. Additionally, some anticipate that as trade negotiations progress with the United States, exporting countries like China may utilize the UK as an alternative market, easing inflationary pressures slightly.
Alan Taylor, an external Commissioner of the BOE Monetary Policy Committee, noted, “If the inflation rate settles in the 2% range, the BOE is expected to ultimately adjust the interest rate to around 2.75%.”