- Inflation indicators suggest the price of food is about to go up.
- Brexit has driven down the value of the pound.
- That will end a sweet period of inflation-free wage growth for UK workers.
It seems like hyperbole to say that Brexit could make all British people poorer. But data came out this week showing that is starting to come true.
It’s all to do with inflation. For the last year or so, the UK has had very little consumer price inflation (CPI). That means any extra pay earned was kept by workers at its full value. Here is a chart from the Office for National Statistics showing those gains:
The red line describes the “true” increase in wages, after inflation, that workers get to keep. For example, if you got a 10% pay rise but inflation was putting up prices at 5%, you’d really only see an increase in the value of your wages of 5%. In periods of high inflation — like 2012 — price increases can actually wipe out any pay gains you make, leaving you poorer than before even if you earned more money.
In 2015 the UK economy hit a rare sweet spot for workers and consumers: Inflation all but disappeared and wages continued to go up. We all kept the full value of our wages and pay rises. It doesn’t get better than that for workers, at least at a macro level.
However, Britain’s decision to leave the EU has driven down the value of the pound by up to 25% in just a few months, making everything we buy from abroad suddenly more expensive. That has already started to trigger an upward movement in inflation.
This chart from Barclays shows that the price of the euro to the pound roughly tracks the CPI for food and drink:
The value of the pound just took a steep drop, and the relative value of the euro made a big jump, depending on how you look at it. Either way, the pound in your wages now buys less stuff than before if that stuff comes from Europe.
That portends a new era of inflation, and particularly food price inflation. Think about cheese and wine and fish.
Inflation affects us all, which is why this data suggests we’re all about to start to get a bit poorer.
But it affects the poor more than the rich. Inflation shows up mostly in the prices of basics: food, fuel, clothing and various consumer goods. Those prices are a much smaller percentage of a wealthy person’s weekly spending than a poor person’s. (A pint of milk costs the same whether you’re a millionaire or a pauper.)
So the Brexit inflation penalty will hit doubly hard: It’s going to make everyone poorer, but some of us will get poorer faster than others.