Eurozone Inflation Declining; UK Continues to Struggle

While the United Kingdom grapples with controlling inflation, the Eurozone experienced a surprising drop in inflation to 5.5%, down from May’s 6.1% and the lowest since January 2022. Despite this positive development, concerns arose as core consumer price growth, excluding food and energy, inched up from 5.3% in May to 5.4% in June. The European Central Bank (ECB) expressed disappointment, emphasizing their commitment to raising interest rates until underlying price pressures align with the 2% target.

In contrast, the United Kingdom reported an inflation rate of 8.7% at the end of May, prompting the Bank of England to raise interest rates by 50 basis points on June 21. There are apprehensions that a subsequent increase of the same magnitude might be necessary to combat inflation. Recent data indicated that, among the G7 countries, the UK had the slowest growth rate for Q1 (except for Germany), and its annual inflation rate of 8.7% in May was the highest.

Experts highlight emerging differences between the UK and the Eurozone, where persistent labor shortages and an energy price crisis contribute to more stubborn inflation in the UK compared to the Eurozone and other G7 nations.

Record job vacancies in the UK, coupled with post-Brexit immigration laws and elevated long-term sickness levels post-Covid-19, are cited as factors affecting the labor market. Analysts also note the impact of the UK government’s Energy Price Guarantee, capping electricity and gas bills for households, which has not been mirrored in the Eurozone. Additionally, the UK’s more service-based economy, compared to the manufacturing focus in the Eurozone, is suggested as a reason for the UK’s inflation struggle.

Economists anticipate July figures to reveal whether this divergence persists. Notably, criticisms of the Bank of England’s handling of inflation by some UK press members have served as a cautionary note within the ECB’s rate-setting council.