CBritain's mineral inflation rate, which excludes volatile items such as energy and food, peaked at 7.1% in May, slower and slightly higher than in the United States and some other high-income countries. If it is currently trending downward in line with headline interest rates, the difference could easily be attributed to the implementation of Brexit and the idiosyncrasies of UK energy pricing.
It would not be surprising then that smaller economies than the euro area or the US would suffer a little more from common shocks, and their inflation paths would be a little harder to predict. However, the core inflation rate is not yet on a downward trend.
Most forecasters believe it is close, given that the Bank of England's large cumulative interest rate rises are comparable to those of the European Central Bank and the Federal Reserve. Many mortgages are now being reset at higher interest rates, and the contagion of monetary tightening is slowing the economy.
As restrictive policies take hold, overall consumer price inflation is expected to fall further towards the 2% target, with weak UK growth, if not recession, continuing until the end of 2024. Perhaps even an unexpected positive outcome similar to the near-perfect disinflation underway in the US may occur. This means that wage demand and price increases will subside without the unemployment rate rising significantly.
Implicit in these relatively optimistic inflation forecasts is the assumption that inflation trends in the UK will be broadly similar to those in other high-income economies. The left argues that what actually drove inflation over the past 18 months was energy and supply shocks from Russia's brutal invasion of Ukraine and spillover from US inflationary pressures. When inflation subsides globally, as it currently does, it will also fall in the UK.
On the right is the argument that the only thing that matters for inflation is the credibility of the central bank's commitment to price stability. Inflation in the UK will also fall if the Bank is willing to tighten monetary policy and raise interest rates as much as necessary to contain price rises. In any case, this inflation cycle is over – and that will soon become clear.
But probably not. Both of these models ignore potentially important aspects of the modern UK economy, and I suspect that inflation in the UK will persist further and be at greater risk of re-acceleration than in the US or across the Channel. Are concerned. Some of these aspects of institutional political economy proved important to Britain's economic development in the 1970s and her 1980s, and their recurrence in today's economic environment bodes ill.
First, the wage growth seen in the UK during the period of inflation since early 2022 has been concentrated at the top of the income distribution. In the United States, by contrast, low-income workers benefit the most.
This is not sustainable, as the lack of wage growth is concentrated in the public health, safety, and transportation sectors. If the UK government continues to ignore recommendations for reasonable pay catch-up in these sectors, industrial action or further disruption of vital services is likely.
Either way, it will cause an increase in inflation. The same would, of course, apply to large pay increases for relevant public sector employees, but agreeing in a cautious and limited manner would reduce uncertainty and the risk of future price and wage pressures.
Secondly, the direct price impact of the implementation of Brexit cannot be denied, particularly on administrative costs for companies involved in the food sector, SMEs and trade. However, that implementation process is not yet complete. Even if this government continues to move towards a more pragmatic relationship with the EU, differences in standards and regulations will increase costs, reduce the availability of various imports, and various temporary exemptions will also increase costs. It will end. As a result, the base rate of inflation is likely to remain higher for some time.
Third, the UK is in its fourth government since Prime Minister Theresa May took office. As a result, aside from the abnormality of trasonomics, fiscal policy has become unstable. If the Labor Party comes to power in the next election, it promises to work towards budget optimization in some way. But unless someone steps up the path of raising taxes and increasing investment, fiscal sustainability and productivity growth will decline. This means that under a given inflation target, nominal GDP growth will decline, triggering another bout of spending and tax cuts, and causing inflation.
In other words, the UK has clear and deep-seated problems in the real economy that neither the US nor the euro area have. I think that despite the same degree of monetary tightening by central banks and the economic slowdown it induces, we will see higher and more volatile inflation in the coming years. Better global energy and supply conditions will help, but will not be enough to restore price stability unless these issues are resolved.
Adam Posen is director of the Peterson Institute for International Economics in Washington, DC.
