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Home Business and Economics

‘Sometimes, reality bites’: Brexit has worsened the cost of living crisis

Stagflation reflects the "realities that Brexit has wrought", economist Adam Posen said.

Jack Peat by Jack Peat
2022-05-16 08:20
in Business and Economics, Economics
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Brexit has worsened the cost of living crisis by making Britain more vulnerable to economic shocks, American economist Adam Posen has said.

Writing in the Financial Times, the Peterson Institute for International Economics president said stagflation – where high inflation and slow economic growth happen at the same time – is on the cards for the UK, reflecting the “realities that Brexit has wrought”.

He said the Bank of England will have to raise interest rates over the next year more than it forecasts this month because the UK economy has been “dragged back to the 1970s”.

The Bank’s Monetary Policy Committee – of which Posen was once a member – is now forced to factor in more “spillover” of international events into inflation expectations.

“This is due to a combination of the UK being a smaller economy on its own, less buffered by its integration in the EU, and an erosion of trust in UK governments to run disciplined economic policies,” he said.  

“Hence, any shocks are likely to result in higher and more lasting inflation than they did before Brexit.”

Bank’s performance

Business secretary Kwasi Kwarteng has said it is clearly “an issue” that the Bank of England is failing to meet its inflation target.

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With the Government coming under intense pressure over the cost-of-living crisis, The Sunday Telegraph reported some Cabinet ministers were unhappy with the Bank’s performance and questioning its independence.

According to the Bank’s most recent forecast, inflation is set to rise above 10 per cent against a target set by the Government of 2 per cent.

During a round of broadcast interviews, Mr Kwarteng said he believed the Governor, Andrew Bailey, was doing a “reasonable job” in difficult circumstances, but the 2 per cent target was part of the Bank’s mandate “and they have to keep it to 2 per cent”.

“Very dificult”

Speaking later on the BBC’s Sunday Morning programme, Mr Kwarteng said it would be “very difficult” to get inflation back down to 2 per cent, although he acknowledged other countries were experiencing similar pressures.

“Most countries in the world are running high single digit, some even double digit, inflation, but they (the Bank) have done a very good job,” he said.

“It’s very easy with hindsight to say that they could have done this or they could have done that. All I know is that Andrew Bailey is a very respected, very capable, central bank governor and he’s doing all he can to deal with this issue.”

Related: Brexit: Financial ‘competitiveness’ could spark race to bottom and dump costs on taxpayers

Tags: Brexitheadline

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