How much is Brexit to blame for high inflation?

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Brexit was a nostalgic project promoted by history alumni like Jacob Rees-Mogg and voted on with great enthusiasm by people over 65. But while 60 per cent of Leave voters saw the economic damage as a “price worth paying” for a political goal, few imagined that the British economy would literally return to the state it was in before joining the EU in 1974, with energy crisis, high inflation and mass strikes.

Brexit guilty, of course, not only in these things. Inflation affects most major economies and is caused primarily by the pandemic, which disrupted both the demand for goods and the supply of goods, and the Russian invasion of Ukraine, which put additional pressure on energy and food prices.

But the UK stands apart, with the highest inflation rate in the world. G7The situation is projected to continue until at least 2024. Some economists blame Brexit: Adam Posen, former Bank of England rate-setter and president of the Peterson Institute for International Economics, explains 80% of the difference between UK and non-UK inflation by the time the UK leaves the EU.

Vicki Price, former head of the National Economic Service and chief economic adviser at the Center for Economic and Business Research, tells me that Brexit’s impact on prices in the UK goes back to the referendum. “We had a very significant drop in the value of the pound,” she explains, “which immediately increased production costs. It also discourages companies from investing, so you’re adding supply issues for the future.” To calm the financial markets, the Bank cut interest rates and conducted a round of quantitative easing (QE), which “freed up quite a lot of extra money.” This money remained in the economy: “We did not start not replenishing the overdue debt.”

It’s hard to unravel how much the Bank’s post-Brexit stimulus measures could really add to today’s inflation rate, but Price believes that this exacerbates the “inflationary trend”, which was then exacerbated by job losses and falling exports. In the EU, businesses have been able to hire, import and export at very low prices. A more discriminatory immigration system and a more global approach to trade may have been political goals, but combined with a weaker pound, they simply increased the cost of doing business – as did additional export-related paperwork, along with confusion over VAT and regulations. origin.

Gerard Lyons, chief economic adviser Boris Johnson as Mayor of London and one of the few economists who has backed Brexit, is much more skeptical about its role in inflation. Lyons told me the labor market data is a combination of 5.4 million EU workers applying for permanent status, a significant increase in non-EU workers due to “very liberal immigration policies” and an increase from 2019 temporary visa for seasonal workers – “does not comply with post-Brexit policies leading to any tension in the labor market.” In other words: It’s not Brexit’s fault that employers are having a hard time filling jobs.

Lyons agrees that the UK’s ability to deal with inflationary factors in the Western economy is hampered by the political decisions of the past: “The key year for the UK economy in recent decades is 2008.” Economic growth “fell sharply after the 2008 global financial crisis and has remained low ever since – and this has highlighted a range of problems, none of which would or likely would not be solved by remaining in the EU.”

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For Lyons, it is not Brexit that is holding Britain back, but the failure to address the problems that have plagued the British economy – weak business investment and over-reliance on loose monetary policy – while we were in the EU. Attitudes towards Brexit affected confidence: “Whenever we had a general election or political unrest, one of the key things was that business quite naturally put things on hold… in 2016 we not only had a referendum, we then had a three-year political crisis… It is not surprising that many firms have postponed their investment plans.”

But Peter Levell, deputy director of the Institute for Financial Studies, tells me that while the impact of Brexit on current inflation is difficult to assess at a time when price increases have been “turbocharged” by Russia’s invasion of Ukraine, there is ample evidence that it has a long-term impact. for prices. A study published by the UK in the Changing Europe think tank in April found that additional trading costs for businesses led to a 6% increase in food prices (above the expected level) between December 2019 and September 2021.

Like the impact on exchange rates or additional quantitative easing, they do not affect the current level of inflation as they happened more than a year ago, but they do affect the ability of people in the UK to cope with inflation.

Levelle says Brexit could affect the UK’s ability to respond to inflationary pressures for a while. In trade, for example, the UK can now lower tariffs on imports from other countries (provided it does so equally in line with WTO rules), which could reduce pressure on prices by increasing imports of, for example, cheap foreign products . cars or food. But the government has so far “shied away” from doing so because there are “political costs”: buyers may like cheap foreign produce, but farmers may not.

As a result, he says, “If you compare the UK tariff schedule with the EU tariff schedule that we had before, they really aren’t that much different… what we have left is an increase in trading costs… and some of these costs will be passed on to consumers.

Price also points out that another consequence of the war in Ukraine is that it has forced the EU to talk more about “becoming self-sufficient” in areas that are now causing inflation, such as energy and semiconductors, and the innovation needed to move forward. to pure zero. “If such cooperation is much more difficult for us, then it will be more costly for us,” she notes. There were many reasons not to want to be a stickler for the rules, but the coming years will show whether being a customer is different or significantly worse.

This article was originally published in Crash, the New Statesman’s regular newsletter on the global economy and the challenges it now faces. Click here to register.

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