UK / Eurozone inflation gap at 17-year high
Simon Ward
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The plunge in sterling has pushed the gap between UK and Eurozone consumer price inflation to its highest level since 1992 – despite the UK number being artificially depressed by December’s VAT cut.
Slower food and energy price gains caused UK annual CPI inflation to ease from 3.2% in February to 2.9% in March but the equivalent Eurozone measure slumped from 1.2% to just 0.6%. The difference of 2.3 percentage points between the UK and Eurozone increases is the largest since a 2.8 point divergence in March 1992 – see chart.
The gap would be significantly larger but for the VAT cut. The CPI at constant tax rates (CPI-CT), which assumes that the reduction was passed on in full, rose by an annual 3.9% in March – one percentage point more than the headline measure. Some retailers have used the cut to boost margins: a conservative assumption that only half of the reduction has been transmitted to consumers would imply “true” CPI inflation of 3.4%, 2.8 percentage points above the Eurozone level.
The gap can be attributed roughly equally to differences in food and energy price trends and “core” inflation – both have been affected by the fall in sterling. The UK CPI excluding unprocessed food and energy – a measure of core prices – rose by an annual 2.3% in March, or 2.9% assuming 50% pass-through of the VAT cut, versus an increase of just 1.5% in the equivalent Eurozone index.
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