UK inflation: Is Brexit causing it to accelerate?

UK inflation jumped to over 10 per cent in July, its highest level since February 1982, intensifying the squeeze on households. Combined with widespread industrial action and a looming recession, the UK economy is beginning to look a lot like it did in the 1970s.

But how much of the UK’s worse-than-average inflation rate and worse-than-average cost-of-living squeeze is down to Brexit? It’s one of the most frequently asked questions.

Former Bank of England policymaker Adam Posen insists that 80 per cent of the reason why the UK has the highest inflation of any G7 country is due to the impact of Brexit on immigration and the labour market.

“You’ve seen a huge drop in migrant labour, a disruption in labour markets that everybody experienced due to Covid and reopening, but with fundamentally less elasticity… and that [Brexit] has to be a major part of it,” he told a conference at Kings College in London earlier this year.

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Others blame sterling’s weakness in the wake of the Brexit referendum in 2016, which inflated input costs and ultimately end-user prices. To calm financial markets, the Bank of England cut rates and applied a bigger quantitative easing (QE) programme, which may also have stoked stronger price growth.

The relatively larger stimulus package applied by the UK government during the pandemic has also been cited. Brexiteers strongly disagree that tighter immigration rules have anything to do with the current price surge – some say they aren’t tighter.

However, it’s hard to get away from the fact that labour supply and prices have been affected by Brexit. Workers aren’t coming in the same numbers and businesses are finding it costlier to import goods from Europe. The UK in a Changing Europe think tank said trade barriers introduced after Brexit had led to a 6 per cent increase in UK food prices between December 2019 and September 2021, adding to the rising financial pressure for households.