Is Brexit Behind the Increased Cost of Living in the UK?
Prime Minister Boris Johnson’s political career is currently dangling by a thread, as a slew of allegations about Downing Street parties during lockdown undermines the UK government. Another thorn in the Conservative Party’s side is the soaring cost of living, with escalating energy costs and the recent tax hike set to bite in the coming months. In this article, we look at whether Brexit is to blame for the current economic crisis in the UK or whether there are other factors at play.
Money managers and banks, at least, have received some positive news. In January 2022 Mairead McGuinness, the EU commissioner for financial services, proposed extending the deadline on equivalence that enables banks to clear trades through the UK. For London, the move has been widely regarded by financiers as a post-Brexit victory, underlying the central role played by the UK capital in the EU’s financial infrastructure post-Brexit.
Looking across the Atlantic, London is currently in talks with Washington regarding a potential easing of aluminum and steel tariffs imposed during Trump’s presidency. Although a transatlantic trade deal may still be some way off, Anne-Marie Trevelyan, UK Secretary of State for International Trade, reportedly met with Gina Raimondo, the US Commerce Secretary, to launch formal negotiations.
In October 2021 Brussels negotiated an easing of US tariffs that were imposed while Britain was still a member of the EU. With Britain having completed its divorce from Europe, those tariffs remain in place for the UK, but no doubt the UK government will be hoping to secure a waiver too.
Over the past month, the UK’s cost of living crisis has intensified. With oil prices skyrocketing and inflation jumping to the highest rate in 30 years in December 2021, the Bank of England is facing mounting pressure to raise interest rates. Consumer price inflation rose from 5.1 percent in November 2021 to 5.4 percent the following month, and financial experts predict that inflation could exceed 6 percent in the spring of 2022 due to tax increases and spiraling energy costs. Lower-income households are predicted to be hit particularly hard, pushed to the brink by escalating food prices.
Despite significant labor shortages in many areas of UK industry, inflation ran significantly ahead of earnings in 2021. Speaking to MPs in Westminster in January 2022, Bank of England Governor Andrew Baily acknowledged that higher inflation was likely to last longer than originally forecast.
Although Brexit has inarguably had an impact, inflation is an increasing global problem. Pressure to raise interest rates to counter inflation is being felt by governments all over the world. In the US, as in the UK, investors are anticipating up to four rate rises this year. Over in the EU, bond market investors are speculating that central banks could speed up their attempts to withdraw stimulus programs. Inflation is even becoming an issue in Japan, a nation that has famously battled deflation for decades.
Oil prices recently reached a seven-year high, continuing their upward trajectory. To counteract this, the US government has urged the world’s leading oil companies to speed up production to keep inflation in check. Despite this, OPEC and others have stuck to their plan, favoring more gradual increases.
In addition to pressures created by Brexit, COVID-19 has inarguably taken its toll. Work-from-home guidance has had a devastating consequence on hospitality and retail in city centers. UK business groups recently welcomed the government’s decision to end restrictions in England.
One particular problem that has arisen in the UK as a direct result of Brexit is the current shortage of immigrant workers. Nevertheless, for some time now, global food prices have been on the rise.
Darren Labbett, the managing director of Woods Foodservice, a supplier to the restaurant trade, said that the industry has been doing all it can to mitigate rising food costs, but he acknowledged that consumer prices would inevitably rise. As he points out, manufacturers’ costs have soared due to a combination of rising demand and supply shortages. Labbett says that, like the rest of the supply chain, his company can’t absorb those price increases forever.
A perfect storm of the pandemic, Brexit, global inflation, and the cessation of COVID-support schemes has poised households across Britain for a difficult winter. Analysis from the Resolution Foundation suggests that UK households could be up to £1,000 worse off in 2022 due to rising taxes and benefit cuts, combined with escalating costs testing how far incomes can stretch.
Despite this, a report published in January 2022 was much more encouraging. Economists have indicated that despite COVID, Brexit, and inflation, the UK could look forward to a rosier long-term outlook than several EU countries, including neighboring France. Looking further ahead, economic analysts said that the UK’s overall economic prospects remain largely unchanged from a Goldman Sachs forecast published 20 years ago.
