Inflation: The U.S. and U.K. Hike Interest Rates

With global inflation spiraling out of control, virtually everyone on the planet is feeling the squeeze on spending in one way or another.

Several unpredictable variables – from the war in Ukraine to rising gas prices in Europe, to a rising dollar and falling sterling – are influencing the way governments and financial institutions tackle rising inflation.

With all signs blinking red, the U.S. Federal Bank raised the federal fund’s benchmark rate by 25 basis points or 0.25% in March 2022.

In June, the Fed raised the key rate by an additional 75 basis points or 0.75% in an urgent effort to slow mounting inflation.

In July, after Consumer Price Index numbers showed U.S. inflation was 9.1% on an annual basis, the Fed raised interest rates an additional 0.75%.

The Fed’s thinking is that by pushing interest rates higher for borrowers on everything from credit cards to home loans, consumer spending will cool, demand for goods and services will slow and inflation will ease.

Additional raises are expected when the Fed meets again at the end of September after its chairman Jerome Powell recently vowed to fight inflation, “until the job is done.”

 So, how does this compare to the U.K.? 

Whilst there are many similarities, a significant missing factor in America’s woes is the gas crunch.

As Russia constricts its oil and gas exports to Europe in the wake of the war in Ukraine, raging energy prices are suffocating the U.K.

This is compounded by Britain’s soaring consumer price index, which rose 10.1% in August – a 40-year high.

In response, England Central Bank’s monetary policy committee (MPC) increased its key base rate by 0.50 percentage points to 1.75% — a significant move, but still not as aggressive as the U.S. and does not snuff out rising gas prices.

In early September, the U.K.’s new Prime Minister Liz Truss resolved to give Brits some relief – announcing the typical household “will pay no more than £2,500 per year for each of the next two years,” which will give the average household “a £1,000 saving per year.”

Another factor compounding U.K. inflation is the weakening pound—recently at a two-year low against the dollar.

Trading essential goods with partner economies experiencing less inflation is applying pressure on the GBP, sending it lower.

Britain is uniquely vulnerable to fluctuations in trading costs because it relies heavily on imports and exports of many goods and services.

The British pound is also sliding lower against the Euro – perhaps in part because analysts feel the European Union is in a better position to deal with surging energy prices than the U.K.

By contrast, the U.S. produces much of its own oil and gas so rising energy costs are not a significant factor influencing inflation.

Regardless of which side of the Atlantic consumers live on, fears of a global recession loom heavily on the horizon.

With the stalling of the world’s main economic powerhouses – from the U.S. to Asia and Europe – the International Monetary Fund (IMF) has warned the world may soon be teetering on the edge of a global recession.

“The outlook has darkened significantly since April,” said Pierre-Olivier Gourinchas, IMF Economic Counsellor and Director of Research.

The IMF forecasts global growth will slow from 6.1% last year, to 3.2% in 2022. The IMF also said the global slowdown, disrupted supply chains, and historically tight labour markets are also key factors in broadening global inflation.

Even with the best efforts of world economic powers, the 2023 outlook for consumers is decidedly uncertain.

Rising interest rates mean financing of many kinds – including credit card debt, car loans, and mortgages – will become more expensive.

Add the surging consumer price index, the rising cost of living, and the energy crisis hitting the U.K. and it becomes an economic war being fought on multiple fronts.


The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.


Chris Lean

Chris is a Chartered Financial Planner who writes blogs and articles to simplify and explain some of the financial issues that affect UK expats. Subjects include; hot topics, regulation and the ever-changing world of finance.

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