Declining Inflation in the Eurozone as the UK Continues to Struggle

Whilst the United Kingdom still struggles to keep inflation in check, inflation surprisingly fell to 5.5% in the Eurozone, down from 6.1% in May, which is the lowest since January 2022. However, before policymakers could start popping champagne corks, the mood was tempered as figures showed a small uptick in core consumer price growth, with core inflation (excludes food and energy) having increased from 5.3% in May to 5.4% in June. This was clearly a disappointment for the ECB (European Central Bank), as until the underlying price pressures fall to the target of 2%, the ECB has confirmed they will keep raising interest rates.

Meanwhile, in the United Kingdom, contrasting figures with the Eurozone show inflation at the end of May at 8.7%, and with the Bank of England raising interest rates by 50 basis points on 21st June, there are fears that in order to keep battling inflation, a subsequent rise of the same amount is in the offing. Furthermore, recently released figures show that amongst the G7 countries, the United Kingdom’s growth rate for Q1 was the slowest (apart from Germany) and as of May, the annual inflation rate of 8.7% was the highest.

Experts point to emerging differences between the United Kingdom and the Eurozone, where the ongoing shortages of labour, plus the energy price crisis, make for a toxic combination resulting in inflation being more stubborn to shift than the Eurozone and other G7 countries. 

Regarding labour shortages, there are a record number of job vacancies, and the United Kingdom is facing additional inflationary pressure as companies across the land increase salaries/wages in attempts to fill these vacancies. Post-Brexit immigration laws are cited as one reason for a declining labour market, whilst post the Covid-19 pandemic, there are record levels of long-term sickness amongst adults of the working age.

Expert analysts also point to the United Kingdom’s governments Energy Price Guarantee (EPG), where for a typical household, electricity and gas bills have been capped at £2,500 pa (1st October 2022 – 1st July 2023). However, similar caps were not introduced in the Eurozone, therefore the recent decline in global wholesale electricity and gas prices are better reflected in their current inflation rate.

Furthermore, economists suggest another divergence between the Eurozone and the United Kingdom is that the UK’s economy is more service based than manufacturing based as opposed to those economies in the Eurozone. This leads to a more balanced economy which is reflected in the fact that inflation across the Eurozone is declining (apart from Germany and Croatia) whereas the United Kingdom is struggling on the inflation front. 

Figures for the end of July will show if this divergence is continuing, however, within the ECB’s rate setting council members have acknowledged that criticism by members of the UK press regarding the Bank of England’s handling of inflation, has served as a cautionary warning to the wise.