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LONDON, May 26, 2010 (FBC) UK inflation eased in April but came in below expectations and outpacing inflation in the United States and much of Europe, putting pressure on the Bank of England to raise interest rates.

Britain has struggled more than other countries to keep up with energy and home heating because of high food prices, labor shortages, and a heavy reliance on natural gas to fill jobs, all of which add to inflation.

Below is an explanation of Britain’s hyperinflation problem.

How does UK inflation compare to other countries?

Britain’s consumer price index rose by 8.7% in April. But it still leaves the country with the highest inflation among the Group of Seven advanced economies, alongside Italy.

By comparison, inflation in the United States was less than 5 percent and 7.6 percent in Germany. In Western Europe, only Austria had a higher ranking.

What about core inflation?

Britain’s inflation, which measures volatile items such as energy and food, rose to 6.8 percent from 6.2 percent in April, surprising investors.

High inflation is seen as a sign that inflation is likely to continue at high levels.

Another measure of price pressures closely watched by the BOE – service price inflation – also rose. Both increases were the strongest for more than 30 years.

Why is food inflation so high in the UK?

Britain has the highest food inflation in Western Europe, with prices rising by more than 19% last year – the country’s worst rate of inflation since 1977.

Average milk and egg prices have risen by more than a third over the year to April. Sugar and olive oil inflation is approaching 50%.

Sudden weather has affected crops around the world, which has increased prices in many countries. But Britain is the third-largest importer of food and drink according to the UN’s Food and Agriculture Organization – behind only China and Japan – and is particularly exposed.

BOE governor Andrew Bailey said on Tuesday that Britain’s food producers may also have locked in higher costs than the BoE had predicted.

Energy prices

Britain is heavily dependent on imported gas to generate electricity and has been exposed to the full force of gas prices that have risen over the past year since Russia invaded Ukraine.

The way Britain controls energy prices for household and business users – it announces major tariff changes every quarter – means that global price rises from many countries have been slow to add to inflation, but falls have also been slow to seep into bills. Users.

Is Brexit part of the problem?

Britain It voted to leave the EU in 2016 and will leave the EU single market in early 2021. Although London and Brussels have an agreement that allows for mostly tariff-free trade in goods, export and import barriers cause paperwork delays and high costs.

The end of free movement of workers from EU countries has led to labor shortages for many employers, which have been more acute in Britain than in other economies, and for consumers to raise wages and ultimately prices.

What do people think will happen to inflation?

The British public’s inflation expectations have moderated somewhat in recent months, perhaps the only bright spot for the BOE as it tracks the risk of inflation psychology creeping into consumer behaviour.

But those expectations remain high.

With inflation falling at a slower pace than the BOE had hoped, it worries that expectations may still be diluted – meaning the public and businesses don’t believe inflation will return to the BoE’s 2% target.

What can the Bank of England do?

Investors and analysts immediately reacted to Wednesday’s data by raising interest rates more than they had previously expected.

Futures show investors a 100% chance the BoE will raise rates to 4.75% now from 4.5% in June, and a 60% chance rates will reach 5.5% by November.

Bank of America and Japan’s Nomura both said they now expect the BoE to raise the key interest rate three times to 5.25% in September, while Credit Suisse and Citi expect two more hikes to 5%.

($1 = 0.7923 pounds)

Writing by Christina Fincher, edited by William Schomberg and Andy Bruce

Our Standards: The Thomson Reuters Trust Principles.

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