The Brexit hit to living standards

The referendum vote is already costing UK households according to a Nottingham economist.

Ahead of Wednesday’s Budget the first detailed analysis of how the Brexit vote has impacted inflation, wages and living standards, has been released.

It shows that UK households are already paying a high economic price and that Brexit is costing the average household 7.74 per week through higher prices - equivalent to 404 a year.

Higher inflation has also reduced the growth of real wages. The impact of price increases due to the referendum is equivalent to a 448 cut in annual pay for the average worker. In other words, the Brexit vote has cost the average worker almost one week’s wages.

Households at all income levels and in all UK regions have been affected. The costs have been evenly shared across the income distribution, but not across regions. The rise in inflation has been lowest for households in London, while Scotland, Wales and especially Northern Ireland have been worst hit.

The largest inflationary effects are for product groups with high import shares. These include bread and cereals; milk, cheese and eggs; coffee, tea and cocoa; beer; wine; furniture and furnishings; and jewellery, clocks and watches.

Dr Holger Breinlich of the University of Nottingham is co-author of the report which has been published by the Centre for Economic Performance (CEP).

He said: “Our findings show that the Leave vote has led to a sharp increase in inflation. At a time of growing disenchantment with austerity, this is clearly unwelcome news for living standards across the UK.”

The report, which is based on research funded by ‘The UK in a Changing Europe’ programme, shows that:

- The vote to leave the EU was an unanticipated shock to the UK economy that increased uncertainty and reduced the expected future openness of the UK to trade, investment and immigration with the EU.

- The pound depreciated by approximately 10% immediately after the referendum. That depreciation raised inflation by increasing the cost of importing both final goods and intermediate inputs. For each 10 percentage point rise in a product group’s import share, inflation increased by 0.71 percentage points in the year after the vote.

- Accounting for both the depreciation and other effects of the referendum, the Brexit vote increased aggregate inflation by 1.7 percentage points in the year following the referendum. There is uncertainty about the exact size of this effect, but the analysis unambiguously shows that the referendum led to a substantial rise in inflation.

- The 1.7 percentage point increase in inflation implies that by June 2017, the Brexit vote was costing the average household 7.74 per week through higher prices. That is equivalent to 404 per year.

- Higher inflation has also reduced real wage growth. The impact of the referendum is equivalent to a 448 cut in annual pay for the average worker. Put another way, the Brexit vote has cost the average worker almost one week’s wages due to higher prices.

- Pass-through from the exchange rate depreciation to higher import costs peaked in the first quarter of 2017, but it continued in the third quarter of 2017.

- Households at all income levels and in all UK regions have experienced higher inflation because of the referendum. The costs have been evenly shared across the income distribution, but not across regions.

- The rise in inflation due to the referendum has been lowest for households in London, while Scotland, Wales and especially Northern Ireland have been worst hit.

Co-author Dr Thomas Sampson of the CEP said: “Even before Brexit occurs, the increase in inflation caused by the Leave vote has already hurt UK households.

“Our results provide compelling evidence that, so far, UK households are paying an economic price for voting to leave the EU.”

Dr Dennis Novy of the University of Warwick, who also contributed to the report, added: “Our research is not a Brexit forecast. It is about the costs of Brexit that have already materialised. Households all across the country are hit by higher inflation - without matching pay rises. The increase in inflation can be directly traced back to last year’s referendum when the sterling exchange rate dropped sharply.”