Blog: Brexit is not to blame for the surge in inflation and soaring food prices – The Telegraph

Indeed, assuming Bank staff are doing the same maths as me, the continued overshoot of inflation could make a half point hike in interest rates more likely when the MPC’s latest decision is announced on Thursday. The markets only expect a quarter-point increase, but there is a strong case for a bolder move. 

Second, many will fear that inflation will rise even further in October when the Ofgem cap is next due to change. Forecasts that CPI inflation will still be 10pc or more at the end of the year will be increasingly common.

For now, I still expect April to be the peak. But this relies on some optimistic assumptions about geopolitical risks and global energy prices, and on better policy choices by both the Government and the central bank.

Third, UK inflation is about to climb above the European Union average (the first estimate for the euro area in April was 7.5pc). The usual suspects will inevitably blame this on Brexit. 

There have already been many strong claims in the last few days, including that Brexit explains 80pc of the UK’s inflation problem, and that it has added 6pc to UK food prices.

Let’s unpick some of this. Brexit has probably added to cost and price pressures in several ways, including  disruption to international trade and supply chains, additional labour shortages, and lower business investment. None the less, there is little evidence the prices are behaving significantly differently in Britain as a result.

UK consumer price inflation has not deviated far from the average in the euro area, and for most of the last year it has actually been lower. Assuming this changed in April, the main factor is not Brexit, but government policy on energy prices.

The Government is allowing more of the increase in wholesale energy costs to feed through to final prices (like in Belgium, where consumer price inflation was 9.3pc in April, or the Netherlands, at 11.2pc).

This contrasts with countries which have intervened more aggressively to keep prices down (notably France, at 5.4pc). Instead, the UK has focused on providing more support via the tax and benefit system.

Some academic studies have attempted to isolate the effects of Brexit on inflation in specific sectors. For example, research published last week by UK in a Changing Europe has suggested that the increase in UK-EU trade barriers led to a 6pc increase in food prices in the UK between the end of 2019 and September 2021.

However, this is hard to square with the actual data, which also show that UK food price inflation has remained relatively low. It is possible that the gap in favour of the UK would have been even bigger without Brexit (this has been a period of sterling strength against the euro, which will have kept import prices down), but a 6pc premium is still a big stretch.

Research in this area has become increasingly dependent on complex methods and models. Sometimes it pays just to step back and look at the underlying data to gauge the plausibility of the results. These appear to fail the “sniff test”.

Some of the commentary here also relies heavily on predictions, instead of hard facts. In particular Adam Posen, the respected US economist and a former member of the Bank of England’s rate-setting Monetary Policy Committee, has been widely reported as saying that Brexit is “80pc of the reason” for the UK’s inflation problem.

Clearly this makes no sense at all if applied to the current rates of inflation. But Posen was actually referring to International Monetary Fund (IMF) forecasts for 2023, when the UK is expected to suffer the highest inflation in the G7.

This is just speculation. Citing IMF projections as evidence here is also circular: the IMF expects UK inflation to remain high because of Brexit and so this is what it is forecasting. But it has been spectacularly wrong on the UK economy for many years.

In short, it is plausible that the departure from the EU has added, a little, to the upward pressures on UK prices. This underlines the importance of efforts to ease trade frictions, reduce uncertainty, and exploit new Brexit opportunities to offset these additional costs. However, any Brexit impact on inflation has been dwarfed by other factors – and this is likely to continue.

Julian Jessop is an independent economist. He tweets @julianhjessop

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