Inflation is still raging here

British inflation is falling less convincingly than in the United States and Europe. The pound is getting a boost from interest rate hikes by the Bank of England (BoE), but the UK is heading for a tough summer.

For a moment, the sky seemed to clear over the British economy. The International Monetary Fund (IMF) announced on Tuesday that the country no longer seems to be heading for a recession. The economy is expected to grow by 0,4% in the current year. That sounds a lot better than the forecast from April, when the IMF still assumed a contraction of 0,3%. The adjustment is largely due to the way in which households and businesses in the United Kingdom manage to keep their heads above water despite very high inflation. Another factor is that the British financial sector was barely affected by the banking crisis in the United States and the problems at Credit Suisse.

Like snow in the sun
A day later, the optimism about the IMF message disappeared like snow through the sun after the publication of inflation figures. In April, inflation stood at 8,7%. Although this is slightly lower than the more than 10% of previous months, economists had expected a drop to 8,2%. Behind the stubbornly high inflation lies, above all, sharply rising food prices. British households spent an average of 19% more on eggs, butter, meat and other foodstuffs. Admittedly, consumers on the European mainland also pay a lot more for this. But the increase in the United Kingdom is very large.

Brexit still hurts
On the same day as the publication of the inflation figures, a study by the London School of Economics was published that puts the finger on the sore spot. According to researchers, almost a third of the price increase is due to the introduction of trade barriers due to Brexit.

Import duties, tighter controls and other measures have cost British households a total of £7 billion. However, the population is in for even more pain. It is clear that the Bank of England will have to raise interest rates again. Earlier this month, disappointing inflation data also caused the BoE to raise interest rates to 4,5% with fresh reluctance. Economists now take into account that the interest rate will be 5% at the end of this year.

What does the pound do?
Households and companies that take out a loan are paying more and more due to rising interest rates. As a result, the prospects for the British economy in the coming months are less favorable than the IMF predicted on Tuesday. Incidentally, the British already have some experience with unpleasant summers. Last year, for example, many vegetables in the fields rotted away because there were too few seasonal workers. In 2021, many shelves in the stores were also empty due to a trucker shortage. And the pound? That gained a little ground on the euro. Because on currency markets, the prospect of rising interest rates still weighs more heavily than disappointing news about the economy. 

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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