UK economy crippled by inflation - are high prices here to stay? (2023)

Introduction

Britain has the highest inflation rate in Western Europe. Last month the rising cost of food contributed to a 10.1% inflation rate, only a slight drop from the month before.

(Subscribe: bit.ly/C4_News_Subscribe)

In the past year, the price of olive oil has gone up by 50%, cheese and eggs over 30% and vegetables 20%.

This is the sharpest 12-month food price increase since records started in August 1977.
-----------------------
Follow us:
Facebook - www.facebook.com/Channel4News/
Twitter - twitter.com/Channel4News
TikTok - www.tiktok.com/@c4news
Instagram - www.instagram.com/channel4news/

Video

Olive oil up 49 milk, up 40 eggs, cheddar bread all up massively.

In fact, food prices have risen to a 45-year high of 19, putting further pressure on households and leaving overall inflation stubbornly High.

Even the price of milk has doubled and bread has doubled and basics so um.

Yes, it has gone up and I I hope.

I live to see the day when it goes down again, everything is more expensive.

Now little food.

Everything is the price is up right, taking just two little pieces, sad and and hungry, and what does she make of the government's response out of touch us who's? Working? We still can't afford to buy decent food.

It wasn't meant to be like this.

After inflation peaked last year we were promised price.

Risers would start to calm down a promise, that's yet to come, true and requiring some explaining from the chancellor.

Well, this is a small headline full, but it disguises a large rise in food inflation, which is causing pressure to families up and down the country as they see their cost of their weekly food shop go up.

This is a common problem that we're all facing and when I talk to my colleagues at the international monetary fund, everyone is very clear that the UK is on the right track.

While food inflation is high across Europe, the UK seems to be the outline when it comes to the headline rate in the UK.

Prices are still soaring in the double digits, whereas inflation in the Eurozone is coming down much faster at just 6.9 percent, with our European neighbors, all seemingly doing better from the Food Markets to the financial markets.

It's not just produce going up now.

Expectations have gone up that interest rates are set to rise further.

It seems to me that the bank of England will look at these numbers and say you know what we haven't quite got.

The results we were hoping for invasion is still too high.

We're going to have to do something a bit more aggressive to try and bring it under control, but is Stephen.

You know, hang on a moment, I'm paying more for my energy bills, I'm paying more in the supermarket.

Now I'm gonna have to pay even more in servicing my mortgages.

That is just not fair.

Well, fairness is one of the biggest challenges with inflation.

Frankly, the problem is that inflation is itself fundamentally unfair and you have to remove it.

If you can't remove it, then that unfairness will continue over a number of years.

So and of course the problem is removing the inflation itself is painful, it's difficult, but idea that inflation is transitory.

Is that incredible anymore? Well, it depends on how long transitory is.

Frankly, it's been much longer than people had originally expected.

I think it looks increasingly embedded because once you've got inflation spreading from these sort of volatile food and energy components to the broader range of inflationary indicators.

At that point, you begin to think this isn't quite working.

According to the rule book, it's going to be a nervous six months for the bank of England and the chancellor Energy prices should come down pretty dramatically.

There is growing concern now, though, whether the rest of inflation will come down with it.

Well I'm joined now in the studio by Kitty Usher Chief Economist at The.

Institute of directors and from Dublin by Stephanie Flanders senior executive editor at Bloomberg, um Kitty Usher.

First, when you look at the fact that the Euros in the Eurozone inflation is coming down, much faster is brexit broadly to blame for the fact that inflation here is so much stickier I, don't think you can immediately draw that conclusion.

No um I think it's actually the result of something quite encouraging, which is that the British economy isn't performing as badly as many forecasters thought it would be in the first quarter of this year.

So we've got more demand in the economy.

Unemployment is really low, and that means that the impacts of raising interest rates hasn't fully changed expectations of falling inflation, and so there's a bit further to go right.

Well, Stephanie Flanders! You were among many who expected I think this inflation to come down faster um.

What confounded your expectations? Well, we had.

We already saw earlier in the week that wage growth was very strong and then in these numbers uh we saw unexpectedly strong growth in in prices where you know from the food prices you were hearing on the piece, but also just the service sector.

The hospitality all these other areas have just have proved to have very sticky prices, we'd hoped that they would just sort of had adjusted upwards after the after covid and then they'd stay there, but actually they're still going up, and that is partly due to labor shortages, which is a problem that certainly the Eurozone doesn't have right.

So you think brexit is more to blame than perhaps Kitty was prepared to accept.

You know, I.

Think Kitty is absolutely right, that it's very hard to say specifically, but we do have an issue for a long time have had an issue that we have the worst of Both Worlds.

We've got a very big squeeze from the energy price hike like the rest of Europe, but we also have increasing wages and a hot labor market from labor shortages, and we we know that obviously there's a piece of that.

That's related to brexit, but we can't say all of this is brexit and the bank of England has to respond whatever the reason they have to try and get inflation down right, so further interest rates Rises on the way Kitty um.

In that context, and with food inflation, soaring I mean milk going up.

40 employees have got every right to ask bosses for Mega pay, Rises, haven't they of course, and um uh.

It's important to notice, though, that uh, the the the the the rise in wages, is not Rising as fast as the rhizome uh inflation.

So this this comes bosses are being rather stingy.

Well, this calms economists down a bit it's because what they're really frightened about is what's called a wage price spiral where it you know it: inflation Rises by a certain amount, wages Rise by more and so inflation Rises uh by more and it accelerates and takes off so it doesn't sound, but I mean what about the poor employees struggling to pay for milk, there's 40 higher.

Of course it's really hard and we've had a lot of debate about the cost of living, um problems and um.

It is absolutely right that there is a problem with labor shortages, but of course, what's different in Britain is not that we're outside the EU is that we have a much higher increase in inactivity which doesn't seem to have taken place elsewhere.

So so you know there is a labor appointment.

It's a slightly different one.

There Stephanie.

Do you think that the government's going to have to give on public sector pay Rises we've been talking about private sector pay, risers and employees asking for wage Rises, but when it comes to public sector, given these price Rises, the government might have to budge mine, though I think I, think what inevitably there's going to have to be a bit of movement and certainly more discussion uh, especially, for example, with regard to the nurses.

The fact that that vote was not so was actually quite close.

I would have thought would suggest that they don't have to do that.

Much more um to make progress on that.

So I think I think.

That's definitely true, but look the world.

Everyone is going to take a hit and we heard on the piece.

Inflation is unfair, but it's also reflecting the fact the world has got more expensive for us, so we are taking a hit and we're poorer because of that and there's no magic in that way with wage increases.

Well, Kitty are some people taking more of a hit than others.

For example, is there profiteering going along amongst businesses um hard to hard to prove uh either way, but I think the important Point here is that when everybody believes that inflation is uh coming down, then that that takes away the propensity for that to happen and just to give us a very simple example.

You know a typical Institute of directors, member might might let their company their supplier might ring up and say.

Oh you know about these inflation figures.

We've really got to put up our prices and if you believe that inflation is endemic, then you're much more likely to think that that's a reasonable thing to say: uh, whereas if you don't you think it's falling you're, much more likely to say I'm really sorry, then we we, we won't use your your goods and services, so expectations are crucially important and they are not yet where they should be it Stephanie.

Has the government got any more tools to keep prices under control? Uh, there's plenty of tools that will you know, go back to the 70s, which one I think economists would hope they don't use them uh you could you could start um trying to have price controls, but in the end that that basic reality that things have become more expensive, it's very hard to avoid that um I think what they will be hoping is that the bank of England, with one possibly another uh interest rate rise, will have had an enough of a squeezing effect on the economy that inflation starts falling faster.

It will start to fall um.

We were wrong this month, but I think there are reasons to think it will continue to fall.

It's just, unfortunately, was probably still be quite far off Target by the end of the year, you're, normally right so we'll.

Let you off, it's definitely Flanders Usher.

Thank you very much.