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Britain is grappling with persistent inflation that makes it look out of place compared to other major economies. China has slipped into deflation, while there are signs that price pressures are easing in the US and the euro zone.

UK consumer prices have risen by 17.6% in the two years since July 2021. While the annual growth rate slowed to 6.8% in July, the volatile parts of the index — food and energy — improved, according to the new data.

The Bank of England has raised interest rates 14 times to 5.25%, a 15-year high, but most economists are surprised by the magnitude of the current price pressure.

Hossein Mahdi, a strategist at HSBC Asset Management, said: “Overall, it is clear that the degree of monetary policy tightening required in the UK will be greater than in the US and the euro area.”

CPI Inflation Line Chart (%, YoY) Shows Decline in Headline Inflation Masks No Progress on Improvement in Underlying Price Pressures

With UK core inflation hovering at 6.9%, the Bank of England’s favorite gauge of domestic price pressures is headed in the wrong direction. Annual service price inflation rose to 7.4% in July from 7.2% in June, the highest level since 1992, with almost all categories getting more expensive and faster, especially rent, holidays, Airfare and restaurants.

This week’s data has economists questioning how much further the Monetary Policy Committee may raise rates from its next meeting in September.

There is one more month of data to come before collection. If this suggests that the latest hot inflation data was a blip, rate hikes could be on hold, or the Bank of England could signal that a September rate hike could be the last.

On top of ongoing price pressure, annual wages rose to 8.2% in the three months to June, the fastest increase since comparable records began in 2001 (excluding the data-distorting period during the COVID-19 pandemic).

Of course, many are happy that wages appear to be offsetting the blow from higher inflation, but the BoE will worry that this could prompt businesses to raise prices even further.

This could prolong high inflation, with marginal benefits to living standards, as higher costs erode gains from higher wages.

Meanwhile, weak retail sales data did little to assuage concerns, as spending on the high street fell in July due to wet weather.

In financial markets, traders took the data to mean the Bank of England would not necessarily need to raise interest rates further than previously expected, but would keep borrowing costs high for longer.

Britain’s 10-year gilt yield, which represents expectations for average interest rates over the next decade, rose to its highest level since 2008 on Thursday, with the government paying a fixed rate of more than 4.7% a year to borrow. next decade.

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Krishna Guha, vice-chairman of Evercore ISI, said that unlike the US or Europe, these persistent inflationary pressures were “unique” to the UK and that as the BoE took further action, the consequences would be ugly of.

“In our view, preventing real wages from catching up too much will require higher unemployment and weaker growth, which could even lead to a (UK) recession,” he added.

Not everything has gone wrong for the BoE, unlike earlier this year when its inflation forecasts missed expectations, raising questions about its credibility.

With the exception of wages, elements of the labor market have cooled and are starting to create conditions that may contain price increases.

The unemployment rate rose to 4.2% in the three months to June from 3.8% a year earlier. Job vacancies have fallen, and by some measures, the number of available jobs per unemployed person is back to the 2019 average.

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Some economists argue that indicators of a fully functioning labor market are a more important guide to future inflation than rapid wage increases.

Samuel Toombs, chief UK economist at Pantheon Macroeconomics, said: “The labor market continues to ease, faster than monetary policy expectations.”

But with the job market slowing, the BoE is caught in a dilemma. “What is forward-looking is not hawkish, and what is hawkish is not forward-looking,” Benjamin Nabarro, chief U.K. economist at Citi, said of this week’s economic data.

Bitter comments like these, however, don’t help the MPC make a decision. If committee members believe that the current rate of 5.25% is “restrictive” and no further increases are needed to lower inflation sustainably, they run the risk of doing too little and appearing weak.

The danger is that inflation remains too high for too long, putting further pressure on high salary incentives and further price increases, implanting an inflationary psychology into society where everyone expects big price increases and adjusts to the new reality .

But if the committee takes another route, as most economists expect, and raises rates further in September or even November, there is a risk of too harsh an outcome and a severe downturn.

This could bring inflation back to 2%, but would do further unnecessary damage to growth and livelihoods.

Monetary Policy Committee member Swati Dhingra, who voted to keep rates at 5%, said: “The risk of overtightening continues to grow, increasing the likelihood of output losses and volatility, necessitating a larger to reverse policy.”

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