LONDON — Albert Edwards, Societe Generale’s renowned strategist, thinks the argument that headline inflation in the UK is rising thanks to the post-Brexit vote is false, and that rising prices in the UK are just part of a much wider trend.
Writing in his latest Global Strategy Weekly note, the avowedly bearish strategist calls out what he describes as the “stupidity” of those asserting that inflation’s rise in the past eight months is as a direct result of the pound’s fall.
Edwards notes that over the same period, both US and German inflation have bounced even quicker than the UK, making the tacit argument that inflation’s rise is down to external factors that go well beyond Brexit.
Here is the key extract from the note — which more broadly discusses Federal Reserve chair Janet Yellen’s recent comments on interest rates (emphasis ours):
“While we are on the subject of inflation, Brexit has been interesting for the stupidity of many of the headlines trying to support a particular bias (both ways). Perhaps the most stupid was this one in the London Evening Standard just ahead of the June referendum, ‘Couples delaying having babies because of fears over a Brexit.’ This nonsense persists, with surging headline UK CPI inflation being attributed to sterlings slump in the immediate aftermath of the vote. What utter tosh. German and US headline CPI inflation have risen even more quickly!”
And here is the chart he uses to illustrate his point:
The general consensus among economists, investors, commentators, and even the Bank of England right now is that the UK’s surging inflation, which hit 1.8% at the latest reading, has been driven largely by the pound’s slump since Britain voted to leave the EU last June.
“Over the next few years, a consequence of weaker sterling is that the higher imported costs resulting from it will boost consumer prices and cause inflation to overshoot the 2% target,” the bank said at the release of its Quarterly Inflation Report earlier in February.
The basic idea is pretty simple. As Britain’s currency falls, buying products from abroad becomes more expensive for companies who import goods. That extra expense then trickles through to consumers, who see the price of their shopping baskets grow in line with the rising costs importers face.
Since June last year, inflation has risen from 0.5% to 1.8% and has pretty much tracked the fall in sterling since that time.
Edwards does not go into any more detail about his thoughts on the topic, but it is certainly an interesting hypothesis.