What does the chart show?

This chart shows the year-on-year core inflation for the UK, US, and Eurozone. The core inflation rate, which is different to the more commonly used headline inflation rate, shows the change in the price of the same basket of goods but excludes things that have more transitory or volatile price changes, such as food and energy. Both food and energy are commodities that can be traded on exchanges which is what makes fluctuations in their prices more volatile so do not reflect longer term price changes. With a basket made up of less volatile goods and services, core inflation tends to change at a slower pace than the headline inflation rate. Having risen steadily in the US, Eurozone, and UK throughout 2022, rising above 6% in the US and UK, and reaching 5.7% in the Eurozone, there are now indications that core inflation is starting to fall in the US and Eurozone. However, in the UK core inflation has continued to rise reaching 6.8%, its highest level since March 1992.

Why is this important?

Last year’s combination of supply chain difficulties and Russia’s invasion of Ukraine drove up commodity prices and with them, headline levels of inflation. Since then, the steady declines in prices have begun to move headline figures back towards their long-term target level of 2%. However, even with headline inflation showing signs of having peaked, central banks continue to indicate that the fight against inflation is far from over as stickier core inflation remains stubbornly high. This problem is particularly relevant in the UK where, despite a falling headline rate, core levels have continued to rise. The issue has largely been attributed to the UK’s labour market which has remained tight, unlike in the US and Eurozone where it has shown signs of cooling. The UK’s high inflation has led to an 18-month run of falling real wages but with the labour market remaining consistently tight, the effects of workers having more bargaining power when it comes to wage increases are emerging. Average wages in the UK rose by 7.5% year-on-year in April, giving a clear indication that the UK has entered a wage-price spiral with an ongoing feedback loop of higher prices leading to higher wages, leading to higher prices. The consequences of sticky core inflation are clear. While other central banks are considering pauses or even cuts to rates by the end of the year, markets are now expecting five more hikes from the Bank of England in 2023, putting further pressure on UK households and businesses as borrowing costs rise. Growth in the UK has surprised to the upside so far this year with the economy defying the expectation of it being the worst-performing G7 economy. However, the possibility of further hikes in the near future means that those predictions may still come true.