Does the UK really have a structural inflation problem?

The UK has developed a reputation for suffering particularly uncomfortable bouts of inflation, a narrative that has resurfaced in recent market commentary. After the experience of the past few years, that perception is understandable. But viewed over a longer horizon and against international peers, it is far from clear that UK inflation is structurally more problematic.

A comparison with the US, Canada and the euro area since the late 1990s points to a more nuanced conclusion. The UK has undoubtedly experienced inflation shocks, most notably in the most recent cycle, but there is little compelling evidence that it is uniquely prone to higher, more volatile or more persistent inflation.

A modern inflation comparison

To keep the analysis relevant, we focus on the past 30-years. This period reflects a meaningful shift in inflation dynamics. The Bank of England gained operational independence in 1997, formal inflation targeting was introduced, labour markets became more flexible, energy markets were liberalised, and global supply chains expanded. Taken together, these changes materially altered inflation behaviour, making earlier data a less reliable guide for today.

CPI inflation (YoY) since 1997 (including 2026–28 consensus forecasts)

Source: Bloomberg, W1M. Data as at 23 April 2026.

Average inflation: broadly in line with peers

On average, UK inflation since 1997 has been slightly lower than in the US, both including and excluding the pandemic period. It has been modestly higher than the euro area and broadly in line with Canada. Even before Covid-19, UK inflation outcomes were unremarkable by international standards. This directly challenges the idea that the UK has a chronic tendency to run hotter than its peers.

Average YoY CPI inflation

Source: Bloomberg, W1M. Data as at 23 April 2026.

Volatility: higher, but not uniquely so

UK inflation has been somewhat more volatile than some peers, but the difference is often overstated. Once the Covid-19 period is excluded, UK volatility actually falls below that of the US. This matters because volatility is frequently interpreted as evidence of a structurally unstable inflation process. In practice, it largely reflects exposure to global shocks, particularly energy, rather than any UK-specific inflation fragility.

Volatility of CPI inflation

Source: Bloomberg, W1M. Data as at 23 April 2026.

Inflation extremes: no clear UK outlier

If UK inflation were structurally more problematic, we would expect more frequent and more persistent periods of high inflation. The data does not support this.

The UK has not spent more time above common inflation thresholds than the US. In fact, US inflation has been above 2% and 3% more often. At higher thresholds, incidence is broadly similar across economies.

Just as importantly, high inflation episodes in the UK have not lasted longer than elsewhere. Average durations of periods above 4% are broadly comparable too.

Another way to test the narrative is to ask how often other economies experience higher inflation than the UK. On this basis, the UK is far from consistently “top of the league”. The US, in particular, has recorded higher inflation than the UK more than half the time, reinforcing the point that UK inflation outcomes are not systematically worse.

Inflation characteristics

Source: Bloomberg, W1M. Data as at 23 April 2026.

Looking at the upper tail of inflation outcomes reinforces the same conclusion. The UK does show slightly larger deviations from its own average during extreme shocks. However, the differences are modest. Prior to the pandemic, US inflation actually exhibited larger extreme moves, while Canada and the euro area remain structurally more stable.

Taken together, the evidence does not support the idea of uniquely “nasty” UK inflation dynamics.

Market pricing versus economic reality

Despite this evidence, market-implied expectations tell a different story. Inflation swaps are pricing higher medium-term UK inflation than elsewhere, a premium that widened following the escalation in Middle East tensions and disruption to shipping routes through the Strait of Hormuz. In the near term, this move is not unreasonable given the likely impact of higher energy prices on UK CPI this year.

5‑Year CPI inflation swap rates

Source: Bloomberg, W1M. Data as at 23 April 2026.

This stands in contrast to economist consensus, which expects UK inflation to return towards target and, over the medium term, to be lower than in the US. Historically, UK inflation swaps have been broadly unbiased versus realised inflation, while US and euro area pricing has tended to undershoot. This suggests a degree of pessimism embedded in UK inflation markets, potentially reflecting recency bias following the sharper UK inflation overshoot in the latest cycle.

The drivers of that overshoot are well understood: post-Brexit labour market tightness, FX weakness, high exposure to imported food and energy, the structure of the energy price cap, and fiscal policy choices. Importantly, prior to the recent escalation in the Middle East, inflation was already moving decisively back towards target.

A more volatile world

It is reasonable to ask whether repeated energy shocks signal a more volatile global inflation regime. The world does appear less stable than it did in the 2010s. However, it is not clear that recent shocks represent a single, persistent inflationary mechanism rather than a sequence of distinct events.

Recent UK policy efforts to reduce the pass-through from global gas prices into domestic electricity costs are directionally encouraging. Over time, this should weaken one of the more important transmission channels into inflation, even if the impact is not immediate.

What this means for gilts

Inflation is the kryptonite of bonds. When inflation is persistent or unpredictable, bond markets struggle to provide reliable diversification. When inflation is falling, better anchored, and more predictable, the case for government bonds improves materially.

Viewed through that lens, the UK inflation backdrop looks less troubling than the prevailing narrative implies. Prior to the recent escalation in Middle East tensions, inflation was already cooling decisively. Since then, higher yields have improved the attractiveness of gilts on both a nominal and real basis, offering a meaningful cushion against any near-term upside in inflation.

10yr Gilt yield

Source: Bloomberg, W1M. Data as at 23 April 2026.

Despite recent events raising the risk of a short-term inflation spike (which we talk about here), the absence of structural inflation exceptionalism and more attractive starting valuations leave us constructive on UK government bonds. While fiscal concerns and broader political uncertainty have contributed to an elevated risk premium in UK markets since 2022, inflation dynamics and their transmission into monetary policy remain the dominant long-term driver of gilt valuations.