Brexit inflation effect: we ain’t seen nothing yet

by InFacts | 16.05.2017

Inflation at 2.7% shows that those who say the referendum vote has been painless are living in la la land. What’s more, it’s set to keep rising. The Bank of England has said it will reach 2.8% by the end of the year, while some analysts think it will rise to 3%.

Inflation, we should remember, was 0.5% on the eve of the referendum. The main cause is the collapse in the pound produced by last year’s vote, which has pushed up the price of imports. With wage growth lagging behind inflation for the first time since mid-2014, the squeeze is getting tighter than ever for already squeezed wage earners.

An analyst at the Resolution Foundation even estimated that this decade could be the worst for pay packets in 200 years. People are certainly being hurt – the sort of people who may well have voted Leave last year.

Brexiters are fond of saying that economists don’t know what they’re talking about. They predicted a hit to the economy after a Leave vote that failed to materialise. What economists got wrong was they assumed households would save for a rainy day. Instead, they borrowed and kept consuming.

But the era of Brexit inflation will now lead people to spend less, especially as wages aren’t keeping up with prices. The whole economy is borrowing from abroad to fund our large current account deficit. We can only keep racking up debt for so long.

Brexiters will probably continue to crow that everything is fine with the economy. Not only do both the rise in inflation and fall in the pound give a lie to that, but Brexit hasn’t yet even happened.

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    Champions of Brexit are particularly in denial about shrinkflation – a new phenomenon where prices don’t rise only because the size of a product gets smaller. Toblerone blazed the trend when it widened the gaps between its triangular chunks of chocolate to reduce a 400g bar to 360g.  It blamed the higher cost of ingredients caused by the pound’s fall.

    Chocolate lovers have also been submitted to smaller packets of Maltesers, M&M’s and Minstrels, while Channel 4’s Dispatches revealed that Birds Eye Fish Fingers post-Brexit contained 10 not 12 sticks, among many other examples of products decreased in size.

    The hit to living standards that we are currently witnessing is sadly the foretaste of further damage yet to come.

    This story incorporates material from previous InFacts articles. It was updated on May 17 to include new average earning figures.

    Edited by Alex Spillius

    One Response to “Brexit inflation effect: we ain’t seen nothing yet”

    • Many people who refer to the Treasury report on the immediate effects of a vote for Brexit, commonly known as”Project Fear”, obviously never got further that the title. It quite clearly says in the introduction that it is discussing the immediate two years, not the very next second.

      And obviously the £170 billion (over £2,500 per man, woman and child living in the UK) that the Bank of England released in August, at the same time as they​ cut interest rates helped to pump up the economy.

      Additionally, prudent companies may have taken a hedge against a fall in the pound. Such contracts have probably come to an end or will do so in the near future, so inflation is set to jump up a great.

      Finally, inflation of claim is measured using a shopping basket of goods and services. I would not be surprised if items not in this shopping basket show greater rates of inflation.