Factbox: UK inflation at 30-year high – what’s changed since 1992?

People shop at a supermarket in London, Britain December 24, 2021. REUTERS/Kevin Coombs

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LONDON, Feb 16 (Reuters) – Britain’s inflation rate hit its highest level since March 1992 in January, when it rose to 5.5% and is expected to extend its rise to over 7% in April, fear a sort of wage-price spiral that once dogged the country’s economy. Read more

Here are five things that have changed the inflation picture since the early 1990s.

BANK OF ENGLAND – Britain’s central bank was only given an inflation target in October 1992, after the country exited the European exchange rate mechanism which had kept the pound pegged to a basket of other European currencies.

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The central bank gained full operational independence in 1997, taking responsibility for supporting or slowing the economy via interest rates out of the hands of politicians. Since then, inflation has averaged around 2% per year.

THE LAWSON BOOM – Britain’s economy boomed in the late 1980s and Margaret Thatcher’s finance minister Nigel Lawson’s sweeping tax cuts have been blamed for causing a sharp rise in inflation. Current Finance Minister Rishi Sunak oversaw the largest increase in peacetime borrowing to support the economy during the COVID-19 pandemic, but the tax burden is now on course to peak since the 1960s.

PAY DEALS – Another driver of Britain’s high inflation three decades ago was steep pay rises won by unions, which remained strong players in the early 1990s despite a sharp decline in their membership over the decade former. Wage increases have lagged inflation for much of the period since the 2008-2009 global financial crisis.

STERLING – In March 1992 the pound was still part of the European exchange rate mechanism which kept the pegged currency at a value which proved too high for the government and the Bank of England to defend against speculative attacks six months later on “Black Wednesday”. The de-anchoring of the pound has finally put the British economy on the road to recovery.

INTEREST RATES – The BoE kept its base rate above 10% for most of the 1980s and it stood at 10.375% in March 1992. The bank rate is currently around one-twentieth from this level to 0.5%. It is expected to rise as the BoE seeks to stamp out any long-term rise in inflation expectations, but only to around 2% a year from now, according to interest rate futures markets. Private economists think it will peak lower than that.

CHINA – The rise of China and other low-cost manufacturing countries in the 2000s helped lower inflation for consumers in wealthy economies around the world. But gradually rising costs in emerging economies, and more recently the disruption caused by the coronavirus pandemic, have hammered global supply chains, driving up the prices of many goods.

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Reporting by William Schomberg and David Milliken; Editing by Michael Urquhart

Our standards: The Thomson Reuters Trust Principles.

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