U.K. Inflation Tops 10%, Underlining Gloomy Outlook for Europe
The U.K.’s annual rate of inflation moved into double digits in July and is set to rise even higher by the end of the year, heaping greater pressure on stretched household budgets and threatening a lengthy economic contraction.
That pickup in inflation has been replicated in other parts of Europe, even as consumer prices have started to slow in the U.S. That is because energy prices have continued to accelerate across Europe as Russia withholds supplies of natural gas, with the continent facing a possible crunch this winter.
The U.K.’s Office for National Statistics Wednesday said consumer prices were 10.1% higher in July than a year earlier, up from 9.4% in June. That was the highest rate of inflation in more than four decades and the fastest increase in prices recorded in one of the Group of Seven rich countries since the current surge started in early 2021.
“Inflation figures continue to paint a worrying picture for consumers and businesses alike, and price pressures are set to build further,” said
Alpesh Paleja,
lead economist at the Confederation of British Industry.
Figures to be released Thursday by the European Union’s statistics agency are expected to show the eurozone’s annual rate of inflation rose to 8.9% in July from 8.6% in June. By contrast, U.S. inflation eased to 8.5% in July from 9.1% in June.
Economists at JPMorgan see increasing signs that global inflation is set to ease, with prices of food and many commodities down from recent peaks. However, they expect that disinflation to be evident first in the U.S., with Europe set to lag behind despite some recent easing in the prices of goods leaving factory gates.
“Europe, however, faces ongoing pressure from surging natural gas prices that have more than doubled over the past three months,” they wrote in a note to clients. “We expect the combined drag of a squeeze on purchasing power and depressed sentiment to tip the region into recession this year.”
July is unlikely to mark the peak in U.K. inflation, since household energy costs are set to rise sharply when a cap on prices is lifted in October. The Bank of England estimates that could send the annual rate of inflation to 13% as the year draws to a close.
The U.K. is suffering a particularly severe surge in prices in part because of its 2016 decision to leave the European Union, which has caused costs for importers to increase, while a weaker pound has also raised the prices of goods and services purchased overseas. Brexit has also reduced the availability of foreign workers in some lower-paid services industries, such as hospitality, pushing costs and prices higher.
However, the U.K. might not be the only one of Europe’s three G-7 members set to face the double-digit inflation that has already hit Spain, Greece and a number of the EU’s eastern members.
Germany’s gas regulator Monday announced a surcharge on gas prices designed to cover most of the increased costs to home energy suppliers since Russia’s invasion of Ukraine. Economists estimate that will send Germany’s annual rate of inflation above 10% from 7.5% in July.
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U.K. figures released Tuesday by the ONS showed wages excluding bonuses were 4.7% higher in the three months through June than a year earlier, a pickup from the 4.4% rate of growth recorded in the three months through May.
Much of the pickup came from the private sector, where wages were up 5.9% when bonuses are included. Many businesses are giving workers one-off payments to help cover surging energy and food costs, as well as standard pay rises. Labor union
on Monday said
had agreed to pay its check-in staff a lump sum equivalent to 5% of their salaries this month, with a regular 5% pay rise to follow in September, and a further 3% increase in January.
“Like most other workers, our members in BA are struggling with the cost of living crisis,” said Oliver Richardson, a Unite official.
The acceleration in wage rises will worry the Bank of England, which wants to avert a self-reinforcing series of wage and price rises of the kind that kept inflation high for many years in the 1970s.
Even as it picked up, wage growth fell further behind the rate of inflation, with the result that real wages fell 4.1%, the largest decline since records began in 2001.
The cost of food has surged in the U.K., prompting some businesses to help their employees cover costs.
Photo:
Jose Sarmento Matos/Bloomberg News
The government has already announced three packages of support to help households meet higher energy bills without having to cut back on other essentials, but economists expect a fourth package to follow the election of a new prime minister early next month.
The government’s response to what has become known as the cost-of-living crisis has been on hold since Prime Minister
was ousted as head of the ruling Conservative Party in early July, and the lengthy process of choosing his successor is due to end on Sept. 5.
The German government, and others in Europe, are also considering additional support for households who will see their budgets shredded by skyrocketing energy costs as these percolate down to end users in the second half of the year.
“We’re putting together another relief package,” German Chancellor
Olaf Scholz
wrote in a tweet Monday. “We don’t leave anyone alone with the higher costs.”
Write to Paul Hannon at paul.hannon@wsj.com
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