UK inflation stays at 10% as bread rises at record clip. Here's why it's proving hard to beat

London CNN

The UK inflation rate remained at 10% or more in March. This is higher than the US and Europe. Bread prices also rose at an unprecedented pace.

The Office for National Statistics reported Wednesday that consumer prices increased 10.1% in March compared to a year earlier, a slight decrease from the 10.4% increase seen in February.

The decline in motor fuel prices was offset by the sharp rise in food costs, which grew 19.2% in the year up to March -- the fastest rate in over 45 years. The ONS reported that bread and cereals, at 19,4%, had the highest rate of annual inflation since 1989.

According to Helen Dickinson of the British Retail Consortium (an industry group), prices for fruit, vegetables, and sugar rose as well 'because poor harvests in Europe, North Africa, and Asia reduced availability and the weakening pound made imports more expensive'. Nearly half of the food consumed in the United Kingdom is imported.

In March, core inflation, which excludes volatile energy and food costs, was unchanged at 6.2%.

The overall inflation rate in Europe and the United States is not as eye-catching. US prices increased 5% over the past year in March. In March, the annual inflation rate in the 20 euro-using countries fell to 6.9%, but core inflation and food prices inflation both reached new highs of 5.7% a 15.5%, respectively.

In a recent note, Ruth Gregory, Capital Economics' deputy chief UK economist, stated that 'inflation has been higher in the UK and has remained higher than anywhere else, because the UK has experienced the worst of both the worlds: an energy shock similar to the euro zone and labor shortages even worse than in the US.'

The Achilles heel of energy

The United Kingdom imports energy in net quantities, unlike the United States. It is more dependent on gas than most of its European neighbours, leaving it more vulnerable to the price spike that followed Russia's invasion in Ukraine.

Martin Beck, Chief Economic Advisor of the EY ITEM Club, said that energy has been the Achilles heel for inflation in the UK over the past year. Energy is used in almost every aspect of economic activity. The UK's exposure to more expensive natural gas has pushed inflation up across the board.

Beck claims that gas is responsible for 60% of the energy consumed by households in the United Kingdom compared to just 40% in the Eurozone.

Gregory said that some governments in the eurozone 'capped their prices earlier and more than those in the UK'.

Tight jobs market

Low unemployment and shortages of workers have also contributed to the UK's inflation, even though wage increases have not kept up with rising prices.

ONS data released on Tuesday showed that the growth rate of regular pay (excluding bonuses) was 6.6% per annum in the three-month period ending February 2023. In comparison, the average hourly wage in the United States grew by 4.2% in march. Hourly wages and salaries in the euro zone increased by 5.1% during the fourth quarter of the year compared to the same period last year.

Paul Dales is the chief UK economist for Capital Economics. He said that the limited labor supply in the UK is partly due to Brexit. This issue does not exist in the US or [euro zone] and the increase in long-term illness has kept the pressure on wage increases.

He said that the long waiting times at the National Health Service in Britain are part of the reason why more people are leaving the workforce.

According to the ONS, between June and August 2022 around 2.5 million people will report long-term illness as the primary reason for inactivity. This is up from 2 million in 2019.

UK inflation falls sharply

As wholesale gas prices fall, household energy bills will also drop.

Lisa Hooker said, "We expect April to bring us better news."

She noted that major supermarkets have already begun to reduce the price of everyday items like milk.

Beck, of the EY ITEM Club, sees headline inflation around 3% for the fourth quarter. This would be in line the government's goal to halve the inflation rate this year. He said that from April onwards, the UK inflation rate could start to fall faster than Europe.

Gregory, of Capital Economics, says that core inflation in the United Kingdom could take longer than expected to decline. She noted that this supports her view that Bank of England would raise interest rates to 4.5% from the current 4.25%. The upside risk of interest rates in the UK is greater than anywhere else.