Everything gets really expensive here

While inflation in continental Europe is coming under better control, everything in the UK is still becoming more expensive very quickly. The question is whether Prime Minister Rishi Sunak's three-step plan will really make a difference in the coming six months.

Eurostat has calculated a provisional inflation rate of 5,5% for the eurozone for June. That is slightly lower than the estimates of 5,6% and the 6,1% achieved in May. It is partly thanks to falling energy prices that inflation is coming under control. In June, energy costs for Europeans were on average more than 5% lower than a year earlier. Across the Channel, however, the inflation picture looks very different. Life is getting more and more expensive there.

Wages: plus 7,2 percent
Combating excessive inflation is primarily the task of a central bank. At the end of June, the Bank of England (BoE) raised interest rates from 4,5% to 5%. This means that the rate is one percentage point higher than in Europe, while the British bank also took action much earlier at the end of 2021. An important reason why inflation in the United Kingdom remains stubbornly high is the great tightness on the labor market. Partly due to stricter entry rules after Brexit, far fewer seasonal workers are coming to the country. The search for staff caused average wages to be 7,2% higher in June than a year earlier. That salary jump is a lot bigger than the 5% on the mainland.

Two promises and one measure
Prime Minister Rishi Sunak recently tried to do his bit to curb inflation. He unfolded a three-step plan, consisting of two beautiful promises and one concrete measure that had also been announced earlier. Sunak especially wants to keep government debt from rising too far and to take the pressure off in segments where prices are rising rapidly. Investments in solar and wind energy, for example, should eventually bring energy prices under control. The government is also holding consultations with supermarkets about the pricing of fruit and vegetables. The most tangible measure is a reduction in the price ceiling for energy, as a result of which British households will spend slightly less on natural gas and electricity from 1 July.

More expensive trip to London
Sunak's three-step plan thus gives many British people some financial breathing space in the short term. But in the long run, BoE policy will determine whether inflation comes under control. As it stands now, UK interest rates will rise to 2023% or 6% for the remainder of 6,5. Such a high interest rate puts a considerable brake on economic growth. There is a good chance that fears of a British recession will flare up in the coming months, but currency markets are mainly looking at interest rate differentials. That explains why the pound has risen by almost 4% against the euro since the turn of the year. As it stands, a trip to London is only going to get more expensive in the coming months. In addition to the high British inflation, this is also due to the rising pound.

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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