Will rising inflation call time on the UK economy’s post-Brexit vote strength?

Inflation Continues To Slow For The Third Month But Fails To Hit 2% Target
Price rises are coming thick and fast (Source: Getty)

Jonathan Portes, professor of economics and public policy at King’s College London, says Yes.

Most forecasters got the near-term outlook for the UK economy after the Brexit vote badly wrong. But one thing they got broadly right was that the pound would fall sharply, and that this would translate into rising inflation, putting pressure on real wages.

While consumer spending held up well at first, it is likely to slow now, and the economy with it; although the broader strengthening of global growth, combined with improved competitiveness resulting from devaluation, will help the UK.

The bigger question is what Brexit means longer term. Article 50 isn’t the beginning of the end of the Brexit process – but it’s the end of the beginning. If things go to plan, it’ll be the usual EU negotiating scenario: long interludes of tedium and small print, interspersed with episodes of late-night brinkmanship, ending in a compromise no-one likes but that lets everyone claim victory.

But if politics derails the process, we could soon find that, far from “taking back control” of our economy, we have done precisely the opposite.

Simon French, chief economist at Panmure Gordon, says No.

The resilience of consumer spending has been the key feature of recent UK growth. There is no doubt that rising inflation and the resultant compression of real incomes poses a challenge to the UK consumer. But it will be the evolution of interest rates and unemployment, rather than inflation, that will ultimately determine the trajectory for consumption spending in 2017.

The Bank of England has indicated it is prepared to look through a temporary spike in inflation and keep policy broadly unchanged. This will help to hold down mortgage repayments, loan costs and credit card APRs. This stance will only change if there are signs that service sector inflation is picking up or price expectations are de-anchoring from 2 per cent. There is scant evidence of either in the most recent data.

On the employment side, the positive impact of falling real wages is that workers become more price competitive compared with machines. While this may stifle productivity it does mean flexible wages can act as a shock absorber for Brexit that otherwise would be felt through higher unemployment.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles