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What has gone wrong? Why does Britain seem to be coming off worse than other nations? Helping to chart the crisis, for Radio 4's The Briefing Room, David Aaronovitch talks to economist and author Duncan Weldon, Mehreen Khan, economics editor of The Times, and Merryn Somerset Webb, senior columnist for Bloomberg Opinion.

After a long time hovering just above 0%, inflation started to rise from summer 2021, exceeding 2% in June that year and then rocketing up to a peak of 11.1% in October 2022.

The rise, therefore, coincided with the end of the lockdowns in Europe rather than the Ukraine War starting in February 2022, when the inflation rate was already 6.2%, more than three times the Bank of England’s 2% target. However, the rise was connected with energy because of a spike in demand caused by business resuming. Meanwhile, people started to spend money saved during lockdown on goods rather than services, causing goods price inflation.

2. Different types of inflation have caused the crisis

Duncan Weldon observes that the UK has suffered from both “the European style energy price shock” as well as an “American-style worker shortage”, whereby a shortage of workers has caused firms to put up wages, increasing their costs “and then putting up their prices to try and protect their profit margins”.

3. The Bank of England acted early on

Heavily criticised it may be, but the Bank of England started to raise interest rates back in December 2021, three months before the war in Ukraine started. This tightening of monetary policy was done four months ahead of the US Federal Reserve and seven months ahead of the European Central Bank. Unfortunately, the Bank of England, says Weldon, will likely be raising interest rates for a longer period than the other big banks.

Mehreen Khan explains that there were a confluence of factors behind the UK’s inflation rate. One factor was that European energy consumers have contracts that protect them from “the vicissitudes of market movements in natural gas prices” whereas the UK’s price cap means that British consumers are much more vulnerable to them.

Another issue was the loss of the UK’s ability to access workers from the European Union after Brexit, shrinking the labour market and removing a driver of productivity and growth. The labour shortage in the UK was one of the reasons that employers held on to their employees after furlough ended in September 2021. The Bank of England had anticipated a significant rise in unemployment, and so decided not to raise interest rates at this point.

5. "'Second round effects’ have made the situation worse"

This sluggish decrease in UK inflation could be explained by phenomena called "second round effects", a phrase used to describe the fallout of an initial external shock (the energy price rise, in this case) and the high inflation resulting from that rippling out to related parts of the economy, e.g. transportation, food, the cost of goods generally.

“The pernicious thing about second round effects,” says Khan, “is that if you've already begun to see them, then, to some degree, it's already a little bit too late.”

6. The government’s dilemma and the Bank of England’s painful medicine

While setting rates is the Bank of England’s domain, the government can influence inflation by cutting its own spending and putting taxes up. Neither of these options are popular ones and, as economist Duncan Weldon notes, “although they might help bring inflation down, they would obviously make economic growth that much harder.”

Equally, if the Bank of England puts up interest rates, growth is harder to achieve because it costs more for companies to borrow and expand their business. “It may be necessary medicine bit it is painful medicine,” admits Weldon.

Forecasters use "core inflation" to get a more stable reading on the domestic economic outlook, factoring out energy and food prices because they tend to be more volatile and are subject to global factors. The higher core inflation is, the more likely interest rates will be raised. In the last couple of months, core inflation has been greater than headline inflation, hitting 7.1% in May, “the highest in 31 years,” notes Khan.

"Core services inflation", meanwhile, is another measure useful to banks. “It’s quite a good proxy for where wages in the predominant area of the UK economy are going,” says Khan, and it indicates whether “inflation might be much stickier than they thought”.

Notwithstanding, a group of economists has, according to Webb, “been shouting as loudly as they possibly can since the middle of 2020, saying, ‘look, money supply is rising incredibly fast and that means that inflation is going to follow.’”

10. Outlook uncertain

While there’s a chance inflation may come down, there is, says Webb, “likely to be a recession either way,” adding: “rising interest rates will have effects throughout the economy that we can't even quite contemplate yet.” How businesses and individuals will fare in the face of rates rising so fast is an unknown quantity and “a new dynamic for almost everybody”.

11. Inflation will dictate political fortunes

While the Conservatives will hope that they can go to the country, most likely, next autumn, against a backdrop of lower or more stable inflation, Labour will also be hoping that the Bank of England administer the painful medicine and push interest rates up now so that they will inherit a better situation later.

“In a couple of years, you'll be much better off than you would if you went into government now,” says Webb, “which would be pretty awful.”

Listen to The Briefing Room: Why is Britain getting inflation so wrong?