Inflation in the UK, what's causing it. No, it's not Brexit. That is a fact.
Inflation continues to grow but Brexit is not the cause
Energy costs push CPI up — but it’s the same around the world
Attempts to blame Brexit don’t wash when other EU countries are in the same boat
The latest UK figures for inflation were published by the ONS yesterday and the glum news was that the UK Consumer Price Index was measured at 9% for April, compared year-on-year with April 2021.
There have been reports in the media trying to put the blame on Brexit, with bankers and retailers volunteering to attribute everything to the British public’s decision to leave the EU. I thought we should take a look at what has been said and explore what the truth is.
So here we go the truth
Brexit inflation? No — Example №1
Business paper Bloomberg reported former member of the Bank of England’s rate-setting Monetary Policy Committee, Andrew Posen, as saying, “Brexit explains 80% of UK inflation” in its headline.
In fact, he said no such thing. What Posen actually said was: “80% of the reason why the International Monetary Fund expects Britain’s inflation to remain elevated for longer than its Group of Seven peers is the impact of its departure from the European Union on immigration.”
That’s quite different from what the headline suggested — but it’s also wrong. The most significant input on UK inflation is the Government’s energy policy and the consequent impact of gas and fuel prices, which has nothing to do with Brexit. That's not me saying it, it's what the Bank of England and ONS have been explaining for months now.
Already factored into the UK’s current inflation rate is the 54% increase in the Ofgem cap on domestic energy bills. There will then be another similar hike of around 40% when the cap is raised again in October. It is the time delay of the energy price cap making its journey through inflation that maintains its impact. To quote the Bank of England in its most recent forecast. Given the operation of the price cap, consumer price inflation is likely to peak later in the UK than in many other countries, and may therefore fall back later.”
- Bank of England Monetary Policy Report May 2022
Bank of England Monetary Policy Report May 2022
Readers may wish to take a wild guess at how many times the word “Brexit” appears in the BoE’s report?
In 112 pages.
But don’t take the UK’s Central Bank as gospel, here’s what the European Commission said:
“Gas supplies a higher share of total energy in the UK than in most EU countries, and higher energy prices will cut deeply into household incomes from April, and again in October, as the regulatory price caps on fuel bills increase.”
Brexit inflation? No — Example №2
Sainsbury’s former chief executive Justin King has blamed Brexit for the rise in food prices. Speaking on Sky News, King admitted the pandemic and Ukraine war have added to retailers’ woes, but chose to emphasise Brexit:
“Well in excess of 40 per cent of our food comes from Europe, so it started with Brexit. Covid exacerbated the problems and of course the war in Ukraine and the particular impact it is having on certain commodities… will be long lasting and significant.”
What Mr King is stating is opinion, not fact. The distortions to the economy from the disruption of lockdowns, business closures permanent or temporary, and the displacement of workers that have created skill shortages have all fed into food price rises. If the rise in CPI or solely food prices are caused by Brexit then an important question has to be asked. Why are the US, the Eurozone, and the wider EU all suffering from rising inflation too, sometimes at higher rates than that experienced by the UK?
King takes no account of the exchange rate nor the expansion of the money supply or the inflation rate in the EU or non-EU countries. It is just an opinion.
Some economists who have studied the reasons for the UK’s inflation would disagree with Mr King, Julian Jessop, for instance.
Julian Jessop, an independent economist at the IEA
“UK consumer price inflation has not deviated far from the average in the euro area, and for most of the last year it has actually been lower. Assuming this changed in April, the main factor is not Brexit, but government policy on energy prices.
“The UK government is allowing more of the increase in wholesale energy costs to feed through to final prices (like in Belgium, where consumer price inflation was 9.3pc in April, or the Netherlands, at 11.2pc).
“This contrasts with countries which have intervened more aggressively to keep prices down (notably France, at 5.4%). Instead, the UK has focused on providing more support via the tax and benefit system.
“Some academic studies have attempted to isolate the effects of Brexit on inflation in specific sectors. However, this is hard to square with the actual data, which also show that UK food price inflation has remained relatively low.”
- Julian Jessop, IEA Economics Fellow and independent economist, correctly predicting the CPI rate on 02 May 2022
It was always going to happen. When the UK has some bad news (and the April CPI of 9% is bad news) there will be people who will seek to blame Brexit.
Like this man and his organisation
The give-away about their motives is that these same people are never willing to recognise and give credit for when something goes well because of Brexit.
Some positives of Brexit have been our economic performance (despite Brexit/despite Covid). This has meant Sterling has appreciated against the Euro in the last year, never falling below €1.15 since May 2021 and often reaching €1.21 — all of which makes foreign imports of food cheaper. It is also odd for people to blame Brexit for causing food prices to rise when the whole point of the Trade & Co-operation Agreement was to ensure there would be no tariffs on imports and exports in trade with the EU. Maybe they forgot we agreed on a deal with the EU?
Yes, there will be some instances of costs being added because of Brexit, just as there will be some savings too ( I have listed many over the years). But Brexit is not to blame for the growth of inflation in Western economies. It’s caused by two things: energy costs and monetary expansion.
What is apparent is that inflation rates in the US and Europe have been broadly similar to the UK’s, some being ahead of the UK while others are lagging behind. But the cost of gas in particular has had an impact on all to some degree and especially on the UK Consumer Price Index.
Nor do Rejoiners such as Justin King give any recognition to the role of monetary expansion — the funding of Government debt by electronically printing money. Payments were made into peoples’ pockets through furlough, Covid business support (subsidies), and huge waste. This additional money that was circulating had not been earned, it was not attached to productive effort, and was essentially free money. With more money chasing a smaller selection of goods, prices were always going to rise and what we are seeing is the result of that. We don’t so much have a cost-of-living crisis as a cost-of-lockdown crisis — and it will take a year to 18 months to work its way through the system. Economists — from our own at the Bank of England, to the Treasury, to those at the European Commission — all expect the inflation to recede. The only unknown and new influence is the Ukraine war. That will likely make recovery to lower inflation rates take longer.
What we need to recognise is that with the freedoms we have gained because of Brexit we can do more than before to change what we do and when. All we need is politicians willing to use those powers and make those changes.
Sources: Bank of England Monetary Policy Committee | Office for National Statistics | The IEA | The Grocer |