UK Inflation Up At 2.9 % – Yes, Brexit And The Falling Pound – Forbes

UK Inflation Up At 2.9 % – Yes, Brexit And The Falling Pound – Forbes

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We have the inflation numbers for the UK today and they’re up, at 2.9%. This is significantly above nominal wage growth meaning that real wages are falling. Fortunately this is not evidence of structural inflation in the UK economy, this is a one off change in prices as a result of the pass through from falling sterling, itself a result of Brexit. Note that the vote itself was just under a year ago, meaning that we’re just now getting that full effect of sterling’s fall into the inflation figures:

Food, energy and recreational costs all helped to push inflation up in May.

The Office for National Statistics say:

Rising prices for recreational and cultural goods and services (particularly games, toys and hobbies) was the main contributor to the increase in the rate.
There were smaller upward contributions from increased electricity and food prices.

Other than electricity, which is still being driven by the costs of the switch to renewables, food and games and toys and so on are all things which are imported, thus affected by that sterling price:

A little lesson in the perils of macroeconomic forecasting there of course. And a useful reminder that planning an economy, in any detail, isn’t going to be something we can do. Simply because we’ve not enough information on what is about to happen to be able to carve an appropriate policy about it. Large and general movements, quite possibly, but nothing in detail:

The impact of the fall in the pound since last year’s Brexit vote made itself felt as consumer prices increased by 2.9 percent compared with a year earlier and its biggest increase since June 2013, the Office for National Statistics said.

Quite so, quite so. And that of course is the reason not to panic over this. There’s an immense difference between inflation as a result of general shortages in the economy (or the equivalent but opposite description, too much money) and inflation as a result of a repricing of things from outside the economy. One is something that will continue on until the cause is dealt with, the second is simply a bolus which will pass through the economy after 12 months.

We don’t need to do anything about Britain’s inflation rate because this is a once off price change as a result of the Brexit induced fall in the pound.

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