The eurozone's annual inflation rate dropped more than anticipated in June to 5.5%, primarily due to significant decreases in energy costs, The Guardian reports.
This figure, reported by Eurostat, is down from May's annual rate of 6.1% and below the forecasted 5.6%. Energy prices contributed the most to the decline, with a 5.6% fall in average prices compared to May's 1.8% annual decline. Although inflation in food, alcohol, and tobacco eased from May's 12.5%, it remained in double digits at 11.7%, putting pressure on households.
In contrast, the UK's annual inflation rate remained elevated at 8.7% in May, the highest among G7 nations. Concerns are growing that the Bank of England may need to raise interest rates above 6% to combat inflation and bring it back down to the 2% target. The UK economy also exhibited slower growth in the first quarter compared to other G7 countries, except for Germany, which is in recession.
Experts attribute the divergence between the UK and the eurozone to various factors. The UK government's energy price guarantee, which capped gas and electricity bills until July, played a significant role. The absence of similar price caps in the eurozone allowed their inflation rates to reflect the recent decline in global wholesale gas and electricity prices. The expiration of the energy price guarantee in the UK is expected to lead to a slight reduction in energy prices, but they are predicted to remain historically high.
Economists also highlight the UK's labor shortages as a driver of higher inflation. Companies are raising wages to attract talent amid record job vacancies, while post-Brexit migration rules have contributed to recruitment challenges. The UK's specific increase in inactivity and acute worker shortages are distinct factors in the inflation disparity. As energy prices are projected to decrease by nearly 20% in July, the gap between the UK and the eurozone's inflation rates is expected to narrow.
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