Staff shortages, tax raids and a weak currency are among the factors exacerbating the UK’s problems
The cost of living crisis is a global phenomenon, no doubt – but Britons may end up having it worse than anyone else.
Kristin Forbes, a former member of the Bank of England’s Monetary Policy Committee, warned last week that “there’s about six factors that feed through into inflation and the UK hits every box”.
People in most countries are feeling the pain from higher energy bills, supply chain disruptions and a hangover from the pandemic. However, price pressures in the UK are expected to be worse and longer lasting.
Why? It’s largely thanks to an extremely tight jobs market, a plunging pound and higher inflation expectations.
Britain is set to experience a toxic combination of these price drivers. In addition, the UK is putting up taxes on households, something few governments are daring to do at a time of soaring living costs.
Forbes, now an economics professor at MIT, told the Treasury Committee last week: “Put it all together, you see why this is a particularly difficult challenge for the UK and why inflation could hit even 10pc by the fall of this year. It is unlikely to hit those sorts of numbers in other countries.”
The inflation rate has already jumped to 7pc but forecasters expect the pressures to get much worse and remain high in the UK for longer.
Figures this week are forecast to reveal that inflation exceeded 9pc in April and the Bank of England’s latest set of gloomy projections predicted the rate will hit double digits by the end of the year, levels last seen four decades ago.
The IMF’s latest forecasts show inflation in the UK hitting 7.4pc over 2022 as a whole. That is much higher than the projections of around 4-6pc for the “big four” eurozone economies of Germany, France, Italy and Spain but slightly lower than the US and in line with many other advanced economies.
However, high inflation is expected to stick around for longer in Britain. While the consumer prices index (CPI) is expected to fall back to between 2-3pc in every major advanced economy next year, the IMF believes it will stay well above target in the UK at more than 5pc in 2023.
Paul Dales, chief UK economist at Capital Economics, says: “I agree with a lot of [Forbes’ comments], although most major economies are experiencing a lot of the same inflationary factors. The US doesn’t have a weaker exchange rate, but the eurozone does.
“The factor that is really only UK-specific is Brexit. It may not necessarily mean that the inflationary pressures in the UK are much, much bigger than elsewhere. But I think it does mean that more of the inflationary pressures are at risk of lasting longer than elsewhere.”
Shortage of workers
A shrinking labour force is fuelling inflation, with businesses forced to pay staff more money to attract the talent they need.
The pool of workers available to firms has not bounced back to pre-Covid levels and tighter immigration controls have cut the supply of cheap labour from Europe.
Adam Posen, a former Bank of England rate-setter, believes this helps to explain more than half of the difference between UK and eurozone inflation. Ministers remain reluctant to use immigration to solve worker shortages.
A dearth of labour is also partly down to the “great resignation” observed during the pandemic, including many elderly workers who have decided to retire early during the upheaval.
According to the Institute for Employment Studies, there are now 1.2m fewer people in Britain’s labour force than before the Covid crisis.
While the US is also experiencing a scramble for workers, the UK labour market is much tighter than Europe’s. There are fears those pay pressures could lead to a wage-price spiral where higher incomes feed back into inflation.
The ONS said average pay, excluding bonuses, rose by 3.7pc from October to December 2021 in the UK. Over the comparable period, EU data shows hourly wages in the bloc rose by just 2.3pc.
Sinking sterling
The UK also ticks the boxes for a weaker currency and higher inflation expectations, a key determinant of future price growth.
The pound has fallen by almost 10pc against the dollar this year, hitting a two-year low last week as speculators ramp up bets on a further drop.
Sterling has been knocked by recession fears in the UK and expectations that the Bank of England’s interest rate rises to tame inflation will be less aggressive than the US Federal Reserve’s. A struggling pound pushes up the cost of imports but the eurozone has also experienced a similar fall in its currency versus the dollar.
Plunging pound
Line chart with 1 data point.
Sterling to US dollar
The chart has 1 X axis displaying categories.
The chart has 1 Y axis displaying £ to $. Data ranges from 0 to 0.
End of interactive chart.
Inflation expectations are one area in which the eurozone has weaker price pressures than the UK. Since the financial crisis the UK has consistently had a higher inflation rate and thus higher expectations for future price rises.
The British public’s inflation expectations for the coming 12 months hit a record high of 6.1pc in March, though it eased back to 6pc in April, according to a survey by Citi and YouGov.
Forbes said: “The UK is coming into this period with inflation that has been higher and more volatile so people are faster to adjust prices and adjust inflation expectations.”
Higher inflation expectations causes workers to demand bigger wage increases to offset the income shock while a history of higher prices means businesses are more comfortable passing on costs to shoppers, according to Forbes.
Goldman Sachs economist Sven Jari Stehn says the increase in inflation expectations also “looks more pronounced in the UK” compared to the US.
“Forward rates of expectations – which discount near-term price expectations that are related to energy prices – remain more clearly anchored around 2pc in the US.”
The risk of intervention
With political pressure building on the Government, it could be pushed into more support for households facing a huge fall in living standards.
So far, the UK also appears unique in the Government’s decision to put up taxes at a time when families are feeling the squeeze. The Chancellor has hit households with the National Insurance hike and by freezing tax thresholds to drag more people into higher bands.
The Labour party has warned the UK is the only G7 country putting up taxes this year.
But economists fear large scale aid could add to price pressures.
Brexit opportunities minister Jacob Rees-Mogg admitted last week that a “constrained” fiscal policy combined with tighter monetary policy is needed to tackle inflation. But the Prime Minister and Chancellor are feeling the heat following difficult local elections that saw the loss of hundreds of Tory councillors and flagship councils in London.
If the election results convince the PM and Chancellor to bring forward fiscal support, and if the Northern Ireland protocol is ditched, Dales says it “would, at the margin, add to price pressures” in the UK.
The IMF has warned countries to target their support at the poorest households. Helping families with the cost of living too much risks stoking price pressures, instead of letting fall back and ease the pressure.
The inflation shock is a global phenomenon but UK households may need to prepare for price pain that is longer and worse than almost anywhere else.
Tories and their voters. They vote to make everything worse.
Struggling to believe anything that anyone tells us these days.
The short answer is Brexit & a Tory Party who doesn’t give a fuck about you.
I wonder how much it would help if something was done about the billions of pounds in offshore bank accounts belonging to politicians and CEOs of big business that have never been taxed.
Corruption.
tl;dr Tories
You can also add a possible trade war caused by Boris giving into coercion from the DUP and messing with the Northern Ireland Protocol.
Yes definitely worse than Sri Lanka with it’s one day of petrol payments left and riots taking place.
Yes definitely worse than Laos with its petrol crisis.
Yes definitely worse than other countries.
ItS gOt nOtHinG tO do wITh bReXIt
Authors of the article clearly didn’t see that we got 350m quid per week back from the EU, look who’s laughing now newspaper man
Tories
Tories
Tories
Oh, and Tories.
Brexit is the short answer. Adding some corrupt politicians leading the country doesn’t help either…
The most incompetent government in living memory?
* Brexit
* A government who doesn’t actually care about helping those affected by the crisis
* A government who for the last 12 years have actively introduced policies that hurt those on lower incomes the most
* A government whose ministers are so far out of touch they have no idea what it is like to not be able to claim for meals out or heating for a second home.
So basically, this government.
More money here to siphon and high standards of living.
> The pool of workers available to firms has not bounced back to pre-Covid levels and tighter immigration controls have cut the supply of cheap labour from Europe.
> Adam Posen, a former Bank of England rate-setter, believes this helps to explain more than half of the difference between UK and eurozone inflation. Ministers remain reluctant to use immigration to solve worker shortages.
They desperately avoided using the word but even the Telegraph are admitting that over 50% of the inflation is thanks to ***Brexit***.
“iTs a wOrKeRs mArKeT”
Join a union.
“Muh brexit” I’ve said it before i will inevitably say it again the eu is a pseudo-fascist organization and i hate it.
> There are fears those pay pressures could lead to a wage-price spiral where higher incomes feed back into inflation.
This is nonsense. Typical neo-liberal spin as to why they can’t give workers pay rises. Saying we can’t increase wages and benefits because it will push inflation is actually avoiding the question “who’s going to pay for inflation?”. It’s a political problem, a political question.
Politicians on the right are keen to say “we need to avoid a wage price spiral so lets raise interest rates” (which is going to help creditors and increase unemployment and hit workers).
They never have the conversation to the extent that profits are driving inflation, which has skyrocketed over the last 40-odd years and particularly over the last couple of Covid years, which have ended up with shareholders and exacerbated wealth inequality, while workers pay has stagnated and gone even lower while productivity has shot up.
Why can’t we tax their wealth and take some of their demand out of the system, but take it from the people who can actually afford it rather than having the lowest paid in society paying for it?
Might it be that our government are a bunch of cunts?
What kind of weird phrasing is this?
“The factor that is really only UK-specific is Brexit. **It may not necessarily mean that the inflationary pressures in the UK are much, much bigger than elsewhere**. But I think it does mean that more of the inflationary pressures are at risk of lasting longer than elsewhere.”
But it may mean that. Or it may mean that they are just ‘much bigger than elsewhere’ or even just bigger than elsewhere’. But it may not.
The LABOUR party in complicit in keeping the Tory party in, by fielding half baked communists and barking mad dominatrixes as candidates. Tony Blair got in because he was charming and centre left. They did ok until the Iraq war.
Is it Brexit?
The Tories somehow have people convinced that they are the ones to sort this crisis out and that Labour would be far worse if they got into power. People are happy to eat this up and so we are left being governed by a party that consistently does all it can to help the rich at the expense of those who voted for them.
Brexit. That was a question, your topic. Right?
I don’t need to read this. Brexit. Voters who can barely read. Tories. A population without a pulse who will let itself be abused
27 comments
Staff shortages, tax raids and a weak currency are among the factors exacerbating the UK’s problems
The cost of living crisis is a global phenomenon, no doubt – but Britons may end up having it worse than anyone else.
Kristin Forbes, a former member of the Bank of England’s Monetary Policy Committee, warned last week that “there’s about six factors that feed through into inflation and the UK hits every box”.
People in most countries are feeling the pain from higher energy bills, supply chain disruptions and a hangover from the pandemic. However, price pressures in the UK are expected to be worse and longer lasting.
Why? It’s largely thanks to an extremely tight jobs market, a plunging pound and higher inflation expectations.
Britain is set to experience a toxic combination of these price drivers. In addition, the UK is putting up taxes on households, something few governments are daring to do at a time of soaring living costs.
Forbes, now an economics professor at MIT, told the Treasury Committee last week: “Put it all together, you see why this is a particularly difficult challenge for the UK and why inflation could hit even 10pc by the fall of this year. It is unlikely to hit those sorts of numbers in other countries.”
The inflation rate has already jumped to 7pc but forecasters expect the pressures to get much worse and remain high in the UK for longer.
Figures this week are forecast to reveal that inflation exceeded 9pc in April and the Bank of England’s latest set of gloomy projections predicted the rate will hit double digits by the end of the year, levels last seen four decades ago.
The IMF’s latest forecasts show inflation in the UK hitting 7.4pc over 2022 as a whole. That is much higher than the projections of around 4-6pc for the “big four” eurozone economies of Germany, France, Italy and Spain but slightly lower than the US and in line with many other advanced economies.
However, high inflation is expected to stick around for longer in Britain. While the consumer prices index (CPI) is expected to fall back to between 2-3pc in every major advanced economy next year, the IMF believes it will stay well above target in the UK at more than 5pc in 2023.
Paul Dales, chief UK economist at Capital Economics, says: “I agree with a lot of [Forbes’ comments], although most major economies are experiencing a lot of the same inflationary factors. The US doesn’t have a weaker exchange rate, but the eurozone does.
“The factor that is really only UK-specific is Brexit. It may not necessarily mean that the inflationary pressures in the UK are much, much bigger than elsewhere. But I think it does mean that more of the inflationary pressures are at risk of lasting longer than elsewhere.”
Shortage of workers
A shrinking labour force is fuelling inflation, with businesses forced to pay staff more money to attract the talent they need.
The pool of workers available to firms has not bounced back to pre-Covid levels and tighter immigration controls have cut the supply of cheap labour from Europe.
Adam Posen, a former Bank of England rate-setter, believes this helps to explain more than half of the difference between UK and eurozone inflation. Ministers remain reluctant to use immigration to solve worker shortages.
A dearth of labour is also partly down to the “great resignation” observed during the pandemic, including many elderly workers who have decided to retire early during the upheaval.
According to the Institute for Employment Studies, there are now 1.2m fewer people in Britain’s labour force than before the Covid crisis.
While the US is also experiencing a scramble for workers, the UK labour market is much tighter than Europe’s. There are fears those pay pressures could lead to a wage-price spiral where higher incomes feed back into inflation.
The ONS said average pay, excluding bonuses, rose by 3.7pc from October to December 2021 in the UK. Over the comparable period, EU data shows hourly wages in the bloc rose by just 2.3pc.
Sinking sterling
The UK also ticks the boxes for a weaker currency and higher inflation expectations, a key determinant of future price growth.
The pound has fallen by almost 10pc against the dollar this year, hitting a two-year low last week as speculators ramp up bets on a further drop.
Sterling has been knocked by recession fears in the UK and expectations that the Bank of England’s interest rate rises to tame inflation will be less aggressive than the US Federal Reserve’s. A struggling pound pushes up the cost of imports but the eurozone has also experienced a similar fall in its currency versus the dollar.
Plunging pound
Line chart with 1 data point.
Sterling to US dollar
The chart has 1 X axis displaying categories.
The chart has 1 Y axis displaying £ to $. Data ranges from 0 to 0.
End of interactive chart.
Inflation expectations are one area in which the eurozone has weaker price pressures than the UK. Since the financial crisis the UK has consistently had a higher inflation rate and thus higher expectations for future price rises.
The British public’s inflation expectations for the coming 12 months hit a record high of 6.1pc in March, though it eased back to 6pc in April, according to a survey by Citi and YouGov.
Forbes said: “The UK is coming into this period with inflation that has been higher and more volatile so people are faster to adjust prices and adjust inflation expectations.”
Higher inflation expectations causes workers to demand bigger wage increases to offset the income shock while a history of higher prices means businesses are more comfortable passing on costs to shoppers, according to Forbes.
Goldman Sachs economist Sven Jari Stehn says the increase in inflation expectations also “looks more pronounced in the UK” compared to the US.
“Forward rates of expectations – which discount near-term price expectations that are related to energy prices – remain more clearly anchored around 2pc in the US.”
The risk of intervention
With political pressure building on the Government, it could be pushed into more support for households facing a huge fall in living standards.
So far, the UK also appears unique in the Government’s decision to put up taxes at a time when families are feeling the squeeze. The Chancellor has hit households with the National Insurance hike and by freezing tax thresholds to drag more people into higher bands.
The Labour party has warned the UK is the only G7 country putting up taxes this year.
But economists fear large scale aid could add to price pressures.
Brexit opportunities minister Jacob Rees-Mogg admitted last week that a “constrained” fiscal policy combined with tighter monetary policy is needed to tackle inflation. But the Prime Minister and Chancellor are feeling the heat following difficult local elections that saw the loss of hundreds of Tory councillors and flagship councils in London.
If the election results convince the PM and Chancellor to bring forward fiscal support, and if the Northern Ireland protocol is ditched, Dales says it “would, at the margin, add to price pressures” in the UK.
The IMF has warned countries to target their support at the poorest households. Helping families with the cost of living too much risks stoking price pressures, instead of letting fall back and ease the pressure.
The inflation shock is a global phenomenon but UK households may need to prepare for price pain that is longer and worse than almost anywhere else.
Tories and their voters. They vote to make everything worse.
Struggling to believe anything that anyone tells us these days.
The short answer is Brexit & a Tory Party who doesn’t give a fuck about you.
I wonder how much it would help if something was done about the billions of pounds in offshore bank accounts belonging to politicians and CEOs of big business that have never been taxed.
Corruption.
tl;dr Tories
You can also add a possible trade war caused by Boris giving into coercion from the DUP and messing with the Northern Ireland Protocol.
Yes definitely worse than Sri Lanka with it’s one day of petrol payments left and riots taking place.
Yes definitely worse than Laos with its petrol crisis.
Yes definitely worse than other countries.
ItS gOt nOtHinG tO do wITh bReXIt
Authors of the article clearly didn’t see that we got 350m quid per week back from the EU, look who’s laughing now newspaper man
Tories
Tories
Tories
Oh, and Tories.
Brexit is the short answer. Adding some corrupt politicians leading the country doesn’t help either…
The most incompetent government in living memory?
* Brexit
* A government who doesn’t actually care about helping those affected by the crisis
* A government who for the last 12 years have actively introduced policies that hurt those on lower incomes the most
* A government whose ministers are so far out of touch they have no idea what it is like to not be able to claim for meals out or heating for a second home.
So basically, this government.
More money here to siphon and high standards of living.
> The pool of workers available to firms has not bounced back to pre-Covid levels and tighter immigration controls have cut the supply of cheap labour from Europe.
> Adam Posen, a former Bank of England rate-setter, believes this helps to explain more than half of the difference between UK and eurozone inflation. Ministers remain reluctant to use immigration to solve worker shortages.
They desperately avoided using the word but even the Telegraph are admitting that over 50% of the inflation is thanks to ***Brexit***.
“iTs a wOrKeRs mArKeT”
Join a union.
“Muh brexit” I’ve said it before i will inevitably say it again the eu is a pseudo-fascist organization and i hate it.
> There are fears those pay pressures could lead to a wage-price spiral where higher incomes feed back into inflation.
This is nonsense. Typical neo-liberal spin as to why they can’t give workers pay rises. Saying we can’t increase wages and benefits because it will push inflation is actually avoiding the question “who’s going to pay for inflation?”. It’s a political problem, a political question.
Politicians on the right are keen to say “we need to avoid a wage price spiral so lets raise interest rates” (which is going to help creditors and increase unemployment and hit workers).
They never have the conversation to the extent that profits are driving inflation, which has skyrocketed over the last 40-odd years and particularly over the last couple of Covid years, which have ended up with shareholders and exacerbated wealth inequality, while workers pay has stagnated and gone even lower while productivity has shot up.
Why can’t we tax their wealth and take some of their demand out of the system, but take it from the people who can actually afford it rather than having the lowest paid in society paying for it?
Might it be that our government are a bunch of cunts?
What kind of weird phrasing is this?
“The factor that is really only UK-specific is Brexit. **It may not necessarily mean that the inflationary pressures in the UK are much, much bigger than elsewhere**. But I think it does mean that more of the inflationary pressures are at risk of lasting longer than elsewhere.”
But it may mean that. Or it may mean that they are just ‘much bigger than elsewhere’ or even just bigger than elsewhere’. But it may not.
The LABOUR party in complicit in keeping the Tory party in, by fielding half baked communists and barking mad dominatrixes as candidates. Tony Blair got in because he was charming and centre left. They did ok until the Iraq war.
Is it Brexit?
The Tories somehow have people convinced that they are the ones to sort this crisis out and that Labour would be far worse if they got into power. People are happy to eat this up and so we are left being governed by a party that consistently does all it can to help the rich at the expense of those who voted for them.
Brexit. That was a question, your topic. Right?
I don’t need to read this. Brexit. Voters who can barely read. Tories. A population without a pulse who will let itself be abused