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Analysis

Welcome to era of Brexit inflation

by Hugo Dixon | 21.03.2017

Those who say the referendum vote has been painless ignore how the pound’s plunge has boosted inflation. And that’s even before Brexit.

The latest consumer price inflation (CPI) figures show a 2.3% increase in prices in February compared to a year earlier. In January, inflation was 1.8%. Last June is was only 0.5%.

Inflation is now at its highest level since September 2013 – and it is set to keep rising. The impact of the sharp fall in sterling after the June 23 vote – it is down 16% versus the dollar – is expected by forecasters to take a couple of years to pass through the system.

Chart showing falling value of pound against US dollar

Source: Bloomberg

Chart showing rising CPI since Brexit vote

Source: ONS

Rising inflation is hurting people’s living standards. Those on low incomes – some of whom voted for Brexit on the lie that it was going to lead to a bonanza of £350 million a week for the NHS – will be among the worst hit.

The government has frozen working-age benefits – including child benefit, jobseeker’s allowance, housing benefit and tax credits – for four years since last April. As several years of high inflation accumulate, some of the poorest people in our country will suffer increasingly. It’s hard to see how that fulfils Theresa May’s promise to create a “country that works for everyone”.

Economic growth has performed well since last June. But rising inflation will lead people to spend less. This is especially so since the current level of consumption has been fuelled by debt – and the whole economy is borrowing from abroad to fund our large current account deficit.

Brexiters often 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.

What we do know is that the prime minister plans to take us out of the EU’s single market and customs union. That’s bound to hurt commerce with a group of countries that account for nearly half our trade. There’s also a risk that we will crash out of the EU without any deal at all. The economic consequences of that would be severe.

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

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Edited by Luke Lythgoe

One Response to “Welcome to era of Brexit inflation”

  • I work in a store. To keep prices from rising, the breakfast cereal manufacturers have been dropping the weights. What was an 800g box is now 720g and 500g is now 430g. This is on two of the most popular brands. Get ready for less of everything!