Why does the UK have highest inflation in G7 and is Brexit a factor? (2024)

Britain has the highest inflation rate in the G7, as the only nation in the group of advanced economies with a reading in double digits after last month’s shock increase.

With the UK appearing to be an international outlier, some economists have suggested Brexit is having an impact.

International comparisons

On a headline basis, inflation is higher in the UK than elsewhere. In the eurozone, annual inflation slowed to 8.5% in February, down from a peak of 10.6% in October, while US inflation eased to 6% last month, a fall from a high of 9.1% last summer.

However, it is not an entirely uniform picture. Inflation rose in France and Germany last month, while the rate for the EU27 dipped slightly from 10% to 9.9%. In the eurozone, analysts had forecast a bigger fall from 8.6% in January to 8.2%. However, pressure from rising food prices – the same culprit for the UK’s shock rise – led to an unexpectedly small decrease.

In both the UK and the eurozone, core inflation – used by central bankers because it excludes energy and food, providing a clearer picture of underlying pressures – rose by more than expected: from 5.8% in January to 6.2% in February for the UK, and from 5.3% to 5.6% for the eurozone.

There are also features of an economy which can cause inflation to rise, or fall, at times that may not be replicated in other nations. The Ofgem price cap in the UK is one example, leading to cliff edges for energy price changes. Economists expect the UK inflation rate to fall sharply in April for this reason, as it is compared against the huge 54% jump in the Ofgem cap 12 months earlier.

While inflation can bob around from month to month – belying an overall trend, and making it harder to isolate Brexit as a driving force – there are still reasons why the UK could be worse off than other nations.

Supply chains

Brexit has added to delivery times and costs for UK imports, a factor likely to be passed on to consumers in the shops.

Part of the inflation shock in February was due to the rising cost of cucumbers, tomatoes and salad, as prices rose amid severe shortages and rationing across the UK last month. Experts had blamed shortages on unseasonably cold weather in southern Spain and Morocco affecting harvests, although others pointed to Brexit, given the lack of empty shelves in EU nations.

Justin King, the former Sainsbury’s chief executive, said the UK food sector had been “significantly disrupted” by leaving the EU, while producers in the bloc warned Britain had slipped down the pecking order for deliveries when supplies are tight.

Research from the London School of Economics shows Brexit had added almost £6bn to UK food bills in the two years to the end of 2021.

However, there are also domestic reasons. Growers blame powerful British supermarkets for driving down the prices they are paid, limiting supply, as well as the government’s approach to subsidising food production. Economists also say soaring energy bills are the biggest driver of food costs, given the impact on everything from fertiliser, tractor diesel and lorry shipments, to keeping bakery ovens fired and food factory production lines rolling.

Worker shortages

On top of supply chain disruption and energy costs, wages also have an impact. In response to the inflation shock, workers are demanding higher pay settlements from employers, while a lack of available staff in many sectors of the economy is forcing companies to offer higher wages to recruit or retain employees.

Tougher post-Brexit migration rules could be adding to the problem, especially in typically lower paying, lower-skilled roles in sectors such as hospitality, where employers used to be able to rely more on EU workers coming to Britain.

Net migration to the UK has continued to rise since to a record level since Brexit, driven by arrivals from non-EU nations making up a reduction in migration from the 27-nation bloc.

However, research from the Centre for European Reform and UK in a Changing Europe suggests Brexit could still have led to a shortfall of 330,000 people in the UK labour force, after taking into account how the workforce might have looked if Britain had remained in the EU.

With older workers leaving the labour market altogether, and record levels of long-term sickness among the UK working age population, the lack of available staff to fill near-record job vacancies could force employers to increase wages – with potential to fuel inflation further.