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Analysis

Brexit inflation to strain pockets

by Sam Ashworth-Hayes | 11.04.2017

After February’s jump in inflation, households got something of a respite in March as inflation stayed steady at 2.3%. This pause is sadly not evidence that the pound’s Brexit-induced slump has passed through the system. Rather it reflects the phases of the moon.

Last year, Easter Sunday fell in March, driving up air fares. This year, it’s in April, so air fares fell, offsetting increases in the price of food and clothes. Next month, inflation’s march is set to resume as this effect flips. Beyond these timing effects, the Bank of England expects annual inflation to move towards 3% by next year as the fall in the pound feeds through to shop prices.

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 the resilience of consumption; they assumed households would save for a rainy day. Instead, they borrowed.

Today, inflation is outstripping wages and interest rates, eroding the value of pay and savings. Over this year, this will weigh down on the strong consumption that has driven Britain’s overperformance, and lead to weaker GDP growth.

With the economy facing the prospect of weaker growth as we adjust to whatever our post-Brexit state is, the Bank is unlikely to act to hold prices down. But a bad Brexit outcome or even just the possibility of one – for instance, the “no deal” Prime Minister Theresa May has threatened to walk away with –  could cause prices to rise faster, and the Bank to raise interest rates, further hitting the economy.

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Edited by Hugo Dixon