Is Brexit responsible for the rise in UK inflation?


The UK’s inflation rate soared to 9.4% in May and is expected to hit 11% later this year, according to the Office for National Statistics. With an energy crisis, tight labor market and massive industrial action, Britain’s economy is beginning to look uncomfortably like the state it was in before joining the EU in 1974.

Brexit is of course only one factor in this situation. Inflation affects most major economies and is mainly caused by the pandemic, which has disrupted both supply and demand for goods, and Russia’s invasion of Ukraine, which has put additional pressure on energy and food prices. But the UK is an exception, with the highest inflation rate in the G7, a situation that is expected to remain the case until at least 2024.

Some economists attribute the difference between the UK and other countries to Brexit: Adam Posen, a former head of interest rate setting at the Bank of England and chairman of the Peterson Institute for International Economics, attributes 80% of the difference between inflation in the UK and in other countries. countries departing from the UK of the EU.

Vicky Pryce, former head of the Government’s Economics Service and chief economic adviser at the Center for Economic and Business Research, tells me the impact of Brexit on prices in the UK dates back to the referendum. “We had a very substantial drop in the value of the pound,” she explains, which “immediately inflated input costs. It also tends to discourage companies from investing, adding to supply issues for the future. To calm financial markets, the Bank lowered interest rates and conducted a round of quantitative easing (QE), which “freed up quite a bit of extra money”. That money stayed in the economy: “We hadn’t started not replenishing maturing debt.

It’s hard to disentangle just how much the Bank’s measures to stimulate the economy after the Brexit vote might have actually raised today’s inflation rate, but Pryce sees it as adding to a “trend inflationary” which was then exacerbated by a loss of workers. and a decline in exports. In the EU, companies have been able to recruit, import and export at very low prices. A more discriminating immigration system and a more comprehensive approach to trade may have been political goals, but combined with a weaker pound they simply increased the cost of doing business – as did the extra paperwork involved in exporting. , as well as confusion around VAT and rules of origin.

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Gerard Lyons, who was Boris Johnson’s chief economic adviser as mayor of London and one of the few economists to support Brexit, is far more skeptical of its role in inflation. Lyons tells me that labor market data – a combination of 5.4 million EU workers applying for permanent status, a sharp increase in the number of non-EU workers thanks to a “very liberal immigration policy” and an increase, from 2019, of temporary work visas to seasonal workers – is not “in line with post-Brexit policy leading to tension in the labor market”. In other words: it’s not Brexit’s fault that employers are struggling to fill vacancies.

Lyons agrees that the UK’s ability to deal with inflationary factors in Western economies is hampered by past policy decisions: “The key year for the UK economy over the last few decades is 2008”. Economic growth “slumped in the aftermath of the global financial crisis in 2008 and has remained weak ever since – and this highlighted a whole host of problems, none of which would or are likely to be solved by staying in the EU”.

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For Lyons, it was not Brexit that held the UK back, but the inability to address the problems plaguing the UK economy – weak business investment and an overreliance on accommodative monetary policy – while we were in the EU. The handling of Brexit has had an effect on confidence: “Any time we’ve had a general election or political unrest, one of the key things is that companies just naturally put things on hold…in 2016 , we didn’t just have a referendum, we then had a three-year political crisis… It’s no surprise that many companies put their investment plans on hold.

[See also: How inflation is worse for women]

But Peter Levell, associate director at the Institute for Fiscal Studies, tells me that while it’s hard to assess Brexit’s impact on the current rate of inflation at a time when rising prices have been ‘turbocharged’ by Russia’s invasion of Ukraine, there is ample evidence that it has a long-term effect on prices. A study published by the UK in a Changing Europe think tank in April found that the extra costs of trade for businesses had driven food prices up by 6% (above the level planned) between December 2019 and September 2021.

Like the impact on exchange rates or additional QE, these are not factors in the current rate of inflation as they happened over a year ago, but they do affect the ability of people in the UK Kingdom to face inflation.

Levell says Brexit could affect the UK’s ability to respond to inflationary pressures for some time. In trade, for example, the UK can now reduce tariffs on imports from other countries (provided it does so equally, under WTO rules), which could reduce price pressure by increasing imports of, for example, low-cost foreign-made products. cars or food. But the government has so far “dodged the opportunity” to do so because there are “political costs”: buyers may like cheap foreign produce, but farmers may not.

The result, he says, is that “if you compare the UK tariff to the EU tariff we had before, they’re not really that different… what we’re left with is increased trade costs…and some of those costs are going to be passed on to consumers.”

Pryce also points out that another effect of the war in Ukraine is that it has led to the EU talking more about “becoming self-sufficient” in areas that are now fueling inflation, such as energy and semiconductors. , as well as the innovation needed to move to net zero. “If this cooperation is much more difficult for us, it will also cost us more,” she observes. There were plenty of reasons not to want to be a rule taker, but the years to come will prove whether being a customer is any different – ​​or considerably worse.

This article first appeared in The Crash, the New Statesman’s regular update on the global economy and the challenges it currently faces. Click here to join.

[See also: How the living standards crisis is driving strike action]


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