UK inflation stays at 10% as bread rises at record clip. Here’s why it’s proving hard to beat

London(CNN) UK inflation remained above 10% in March, far higher than in the United States and Europe, as bread prices rose at a record pace.

Consumer prices rose 10.1% last month compared with a year ago, down only slightly from 10.4% in February, the Office for National Statistics said Wednesday.

A decline in the cost of motor fuels was offset by a sharp increase in food prices, which rose 19.2% through the year to March — the highest rate in more than 45 years. And at 19.4%, bread and cereals notched the highest annual rate of inflation since records began in 1989, the ONS said.

The prices of fruit, vegetables and sugar also rose “as poor harvests in Europe and North Africa reduced availability, and the weak pound made importing more expensive,” according to Helen Dickinson, CEO of the British Retail Consortium, an industry group. The United Kingdom imports nearly half of its food.

Core inflation, which strips out volatile food and energy costs, remained unchanged in March at 6.2%.

Overall inflation in the United States and Europe is less eye-catching. US prices rose 5% year-over-year in March. Across the 20 countries that use the euro, the annual inflation rate fell to 6.9% in March, although core inflation and food price inflation reached record highs, of 5.7% and 15.5% respectively.

“Inflation in the UK has risen further and stayed higher than elsewhere, as the UK has endured the worst of both worlds: a big energy shock (like the euro zone) and labor shortages (even worse than the US),” Ruth Gregory, deputy chief UK economist at Capital Economics, said in a note.

Energy an ‘Achilles’ heel’

The United Kingdom is a net importer of energy, unlike the United States. It is also more reliant on gas than many of its European neighbors, which has left it more exposed to the surge in prices that followed Russia’s invasion of Ukraine.

“Energy has been the UK’s Achilles’ heel in terms of inflation for the last year,” said Martin Beck, chief economic adviser to the EY ITEM Club. “Almost every economic activity uses energy in one way or another. Because the UK has been exposed to more expensive gas, that’s pushed up inflation across the board.”

According to Beck, gas accounts for around 60% of household energy consumption in the United Kingdom, versus just under 40% in the euro area.

Also, some euro area governments “capped prices sooner and by more than in the UK,” said Gregory.

Tight jobs market

UK inflation has also been sustained by low unemployment and worker shortages, which have led to robust wage growth, even though pay rises have not kept pace with surging prices.

Year-on-year growth in regular pay, which excludes bonuses, was 6.6% in the three months to February 2023, ONS data showed Tuesday. By comparison, average hourly earnings in the United States increased 4.2% in March. In the euro area, hourly wages and salaries increased 5.1% in the fourth quarter compared with the same period the previous year.

“The limited supply of labor in the UK, partly due to Brexit, which isn’t an issue in the US or the [euro area], and due to the rise in long-term sickness… has maintained the upward pressure on wage growth,” said Paul Dales, chief UK economist at Capital Economics.

Lengthy waiting times for treatment from Britain’s National Health Service are partly to blame for the growing number of people falling out of the workforce, he added.

Between June and August 2022, around 2.5 million people reported long-term sickness as the main reason for economic inactivity, up from around 2 million in 2019, according to the ONS.

UK inflation to fall sharply

The good news is that UK inflation is expected to fall rapidly through the remainder of the year, as lower wholesale gas prices feed through to household energy bills.

“We are already expecting April to bring better news,” said Lisa Hooker, head of consumer markets at PwC.

Already, major supermarkets are starting to cut the prices of everyday items such as milk, she noted.

Beck of the EY ITEM Club sees headline inflation at around 3% in the fourth quarter, which would be in line with the government’s target to halve inflation this year. From April, “UK inflation might start to drop faster than in Europe,” he said.

But core inflation could take longer to fall in the United Kingdom, according to Gregory of Capital Economics. “This supports our view that the Bank of England will raise interest rates from 4.25% now to 4.5% and keep them there all year,” she noted. “The upside risk to interest rates is perhaps greater in the UK than elsewhere.”