A man shops next to Clubcard price branding inside a branch of a Tesco Extra Supermarket in London, England, on Feb. 10, 2022.PAUL CHILDS/Reuters
One day after another dismaying U.K. inflation report, Nigel Farage – champion of Brexit, current TV talk show host – went on a Twitter offensive.
His target: Bank of England Governor Andrew Bailey.
“He is no good. It is time he was sacked,” the former leader of the populist UK Independence Party ranted in a video tweet Thursday.
“He didn’t see inflation coming … Now, rates are going to soar, and anybody with borrowings is going to pay the price,” he said.
“This bloke is a total incompetent.”
The tirade came just hours before the Bank of England did, indeed, increase its policy rate by half a percentage point to 5 per cent, escalating its uphill battle against Britain’s serious inflation problem. The U.K. inflation rate was 8.7 per cent in May, among the highest in the industrialized world. It’s nearly double Canada’s rate. It’s 2.6 percentage points higher than the euro zone average.
Mr. Farage’s bit of political theatre likely made him seem pretty clever to his supporters, staunch euro-skeptics who voted in 2016 to pull Britain out of the European Union. Mr. Farage even sprinkled some Brexit ideology into his anti-Bailey mix, arguing that what the country really needed in a central bank boss was “a Brexiteer … someone who believed in making us competitive.”
But his offensive is a smokescreen. He wants to deflect blame from where it clearly belongs: on Brexit itself.
Britain’s withdrawal from the European trade bloc is a major contributor to the country’s sad inflation story. It has exacerbated strains on supply chains and labour markets throughout the recovery from the COVID-19 recession. It has created new cross-border complications and paperwork headaches for importers. The effect has been to pile additional costs onto an already steeply inflationary global environment.
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The damage is most readily apparent in Britain’s soaring food prices. Year-over-year food inflation was 18.4 per cent in May, down only slightly from the peak of 19.2 per cent in March. (By comparison, Canada’s food inflation in April – the latest figures available – was 8.3 per cent.) In the past few months, the British have endured the highest food inflation in 45 years.
Food prices throughout Europe have soared in the past year; Russia’s invasion of Ukraine and unfavourable crop-growing weather have hurt the entire region. Still, Britain’s food inflation rate is far above the euro area’s average of 13.7 per cent in May.
Researchers at the London School of Economics recently dug into price data to quantify the proportion of food inflation attributable to Brexit effects. They looked at food products that were more exposed to imports from EU countries prior to the Brexit referendum of 2016, compared with products that have less EU import exposure.
Prior to Brexit, there was little difference in inflation between the two groups. Since then, price increases have been notably steeper for high-EU-exposure foods. That trend has accelerated markedly since the Trade and Cooperation Agreement between the U.K. and the EU took effect at the beginning of 2021, effectively marking the end of Britain’s membership in the EU trade bloc.
The LSE analysis found that of Britain’s 25-per-cent increase in food prices since the end of 2019, nearly one-third can be attributed to the Brexit split. Just since January of 2022, the researchers estimated, foods more exposed to EU imports have risen 3.5 percentage points more than the less-exposed group.
The researchers said that these inflationary effects “were entirely driven by products with high non-tariff barriers.” This refers to cross-border restrictions such as regulatory and sanitary standards, labelling requirements and customs inspections that can significantly slow trade flows and add costs, and are particularly intensive for foods such as meat and cheese. Within the EU, members have mutual exemptions from many such measures; outside of the EU, British consumers must shoulder these costly trade barriers.
Beyond non-tariff barriers, Brexit has also added to Britain’s labour shortages, as the free movement of in-demand workers from EU countries has ended. A study from the Centre for European Reform estimated that Brexit has cost the British labour market more than 300,000 workers. Extreme tightness in the labour market has fuelled wage inflation: Three-month wage growth was running at an annual rate of more than 7 per cent in April.
Now, clearly, Brexit isn’t to blame for all of this mess. As Canadians know all too well, Britain holds no monopoly on high inflation, or strained labour markets or rising interest rates. But Brexit has absolutely added to the economic pressures, and misery, that have left Britain in considerably worse shape than many of its global peers.
“Brexit did not cause all of the UK’s economic problems, but it made almost all of them worse,” said Adam Posen, head of the Peterson Institute for International Economics, a U.S. think tank, in an op-ed in the Financial Times last week.
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Lord knows that Andrew Bailey – along with central bankers in many other countries, including Canada – has a share of the blame for misreading early inflation signs and acting later than he should have to raise interest rates. But mistakes in a complicated economic time are one thing; the self-inflicted wound of Brexit is something else entirely.
Nigel Farage and his Brexiteer bedfellows seduced Brits with unsubstantiated claims and unrealistic promises, and this is the price the country is paying. If Mr. Farage insists on laying blame, he might start by looking in a mirror.