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The Trouble with Sticky Inflation

June 30, 2023

Inflation in major developed economies is yet to be tamed.  The UK’s situation is currently the most acute as wages and “core” prices, excluding food and energy, are rising by approximately 7% on an annualized basis.  Yet even as headline rates elsewhere have dropped as the energy shock has faded, core inflation has been stubborn.  In both the US and the Euro area, CPI for May dropped slightly but still exceeded 5%.

Many governments are adding fuel to the fire by running budget deficits on a scale typically seen during economic slumps.  In the UK, mortgage rates are surging, causing pain for aspiring and existing homeowners while rising interest rates in the Euro area create headwinds to financial stability, notably Italy.  As further rate hikes are expected for both the US and UK in the coming months, this is negative for overall aggregate economic demand.


Figure 1: CPI Levels for UK, Eurozone, and US

Source: Wall Street Journal