It is so much simpler to interpret the UK economy if you attribute every single problem to Brexit. But it is also wrong.
Last week, for example, the EU statistics agency Eurostat released preliminary data suggesting that consumer price inflation in the euro area fell from 8.5pc in February to ‘just’ 6.9pc in March, including a drop from 9.3pc to 7.8pc in Germany. The pain in Spain may already be over, with inflation there expected to be a balmy 3.1pc.
In contrast, the UK consumer price (CPI) measure rose to 10.4pc in February. The March data (out on 19 April) will probably still be around 10pc. Cue the predictable cries of ‘it was Brexit wot done it!’, from all the usual suspects.
However, even the briefest of glances below the hood tells a very different story. The gap between inflation in the UK and in the rest of Europe can almost entirely be explained by energy prices.
If you look instead at consumer prices excluding energy, inflation in the euro area actually rose from 7.8pc in February to 7.9pc in March. The equivalent figure for the UK was 7.6pc in February, so it was lower than in the euro area, and lower than either Germany (7.8pc) or Spain (8.1pc). The picture for March is unlikely to be much different.
There are several reasons why energy price inflation may be higher – and stickier – in the UK than for our competitors in Europe. These include peculiarly British approaches to the setting of wholesale electricity prices, a high dependency on natural gas, and the operation of the Ofgem cap on domestic bills. Higher costs due to the ‘net zero’ agenda have not helped, either.
These reasons also include a preference for helping the most vulnerable households and businesses by topping up their incomes, rather than aggressive intervention (including tax cuts) to keep prices down. This means that measured inflation has been higher in the UK than in countries like Spain, or France, where the state has simply not allowed energy costs to rise as far. But consumers have still been protected.
We can debate the merits of all these choices on energy policy. However, the crucial point is that they are nothing to do with our departure from the EU. Anyone claiming that headline inflation is relatively high in the UK ‘because of Brexit’ is just not doing their homework.
What about food prices? Here many Remainiacs have gone into overdrive. One even claimed over the weekend that ‘our food inflation is the highest in the world thanks to Brexit’, which was gleefully liked and retweeted by her more gullible followers. This is utter nonsense.
Here are the easily verifiable facts. The UK CPI measure of inflation for food and ‘non-alcoholic beverages’ (whatever they may be) was 18.0pc in February. This was a little above the euro area average (17.3pc), but lower than the rate in many comparable countries, including Belgium, Germany, Portugal and Sweden. It was also below the average for the EU as a whole (19.1pc). So UK food inflation is not even the highest in Europe, let alone ‘the world’.
Industry surveys do suggest that UK food price inflation rose even further in March. But the preliminary data for the euro area show that it has hit new highs in the rest of Europe too. In particular, the national measure in Germany could be as high as 22.3pc.
Finally, if we just look at the standard measure of ‘core’ inflation, which strips out energy, food, alcohol and tobacco, the underlying rate was 6.2pc in the UK in February. Again, this was little different from our peers in the euro area (where the average was 5.6pc) or the EU (6.6pc). Any gap can also easily be explained by non-Brexit factors, including the pass through of higher energy costs to other prices.
Inflation is only one of several examples. Another is the deterioration in the UK’s deficit in trade in goods. Balance of payments data last week confirmed that this deficit had widened to more than 10pc of national income in 2022, which again some were quick to blame on Brexit.
Instead, the real culprit was, once more, the surge in energy prices, which massively inflated the import bill. This also drove the EU’s trade balance in goods to a record deficit – indeed the first on record, because the EU usually runs a sizeable surplus!
Of course, the fact that inflation is just as big a problem in the rest of Europe is no consolation for British households and businesses struggling to pay their bills. But those suffering from ‘Brexit derangement syndrome’ do us no favours by misdiagnosing the problems.
I am not sure how else to describe this. Tunnel vision? Confirmation bias? Monomania?
More positively, inflation should fall sharply in both the euro area and the UK over the rest of the year. UK energy price inflation will still follow the euro area down, once our quirks have worked through.
This is despite OPEC’s decision over the weekend to cut oil production. Even after Monday’s 6pc jump, the price of crude is more than 20pc below where it was a year ago. The fuel price component of UK consumer inflation should still turn negative soon, if it has not done so already.
Food price inflation is also set to tumble. The UK will become less dependent on seasonal imports as the weather improves. The producer price measures suggest that pipeline pressures in the food industry have already eased significantly.
‘Core’ inflation may prove a much tougher nut to crack – and this is what is most worrying the Bank of England. Those who have been continually and wrongly predicting that the jump in inflation will be ‘transitory’ have tended to focus just on energy and food prices, ignoring the underlying trends. Indeed, around two-thirds of the overall basket of goods and services recorded a 12-month inflation rate of more than 4pc in January.
Fortunately, there is another reason for optimism here. The flood of cheap money which has allowed such a broad-based rise in prices has now turned into a trickle, as monetary and financial conditions have tightened. This will be an increasing headwind for the real economy. But it does mean that UK inflation is set to fall sharply over the rest of the year – regardless of the latest Brexit scaremongering.
This piece was first published in the Daily Telegraph on 4th April 2023
Plain-speaking Economics 