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Brexit Partly to Blame For High UK Inflation, BOE Official Says

Economy Nov 30, 2022 11:14
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(Bloomberg) -- Brexit is partly to blame for historically high inflation in the UK by causing job shortages, strengthening pricing pressure among firms and weakening the economy, Bank of England chief economist Huw Pill said.

The central bank has estimated that leaving the European Union will cost the UK 3% in permanently lost national output within 15 years and has seen no reason to change the assumption, he added.

Speaking at a conference on Wednesday, Pill stressed that the bank’s focus remained on returning inflation -- which hit 11.1% in October -- to its 2% target, adding that he expects to see headline inflation tailing-off “quite rapidly” in the second half of next year.

However the BOE’s job has been complicated by Britain’s exit from the European Union, he argued. Leaving the EU is putting upward pressure on prices through three channels: changes to migration, reduced competition and lower trade intensity. 

His comments add to questions about the UK’s new trade deal with the EU following newspaper reports that senior figures in government would like closer ties to reduce border frictions and ease skills shortages. It was some of the most detailed and wide-ranging remarks the BOE has made about Brexit.

Ending free movement with the EU has made it more difficult for companies to hire people from overseas, requiring them to support visas. Pill said that while overall migration has not been affected, the nationality of migrant workers has shifted toward more people from outside the EU. 

“Whether those those people are as immediately productive and fungible in the labor market, I think is at least open to question,” Pill said.

Brexit has also altered competition between firms, “which probably means there is greater pricing power in value chains, and that has probably proved to be somewhat inflationary,” he said. “The trade channel is having an impact on innovation and productivity.”

“Brexit plays a part, but I don’t think it’s the whole story and probably only part of the story. But to my mind it has had some effect.”

Pill was addressing a panel organized by the Institute of Chartered Accountants in England and Wales, where he also called on the government to help clear blockages in the labor market to ease wage price inflation.

“The ball is in someone else’s court” to fix the UK’s shrinking workforce and the problems with the health service, Pill said, heavily implying these are issues for government to solve. 

He said the BOE would be in a stronger position to fight inflation if the productivity and staff workforce dropout problem in the labor force was solved.

“Our job would be easier, and the health of UK economy in terms of growth and dynamism would be better, if those supply side factors were dealt with in an appropriate way,” he said.

The UK is the only developed economy not to have recovered to pre-Covid levels of GDP growth, struggling with tight labor market conditions with 600,000 fewer workers than before the pandemic, concentrated among 50-64 year olds. 

Throwing heavy hints that the problem is one for government to address rather than the BOE, Pill suggested that creating incentives for people to be more productive in the labor market could be beneficial in helping to solve supply side constraints, as well as ensuring the NHS delivers care more effectively to keep people in the workforce. 

“But those are decisions that are not in our remit,” he added. “Of course they are decisions that it would be good to take. So I think there is a ball in some other people’s court here.”

Brexit Partly to Blame For High UK Inflation, BOE Official Says
 

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Comments (11)
Graham Kinnear
Graham Kinnear Nov 30, 2022 23:07
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Nothing to do with the B of E being well behind the curveby sticking with its transitory inflation story then
Harry Baker
Harry Baker Nov 30, 2022 18:24
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BOE fully to blame for inflation.
Dave Kearsley
Dave Kearsley Nov 30, 2022 14:31
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Nothing fundamentally different to what has happened in the EU. Inflation for many of the Baltic and Eastern Countries is much worse. Massive Quantitative Easing, COVID supply shocks and extreme energy prices have massively impacted the entire global economy. The policy response of austerity in the UK will only exacerbate this as it did in the 80s.
David Roberts
David Roberts Nov 30, 2022 13:17
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Island Nation decides to cut ties with one of the largest tariff free trading blocks and then denies that this has caused labour shortages or goods shortages leading to inflation. Only the most ignorant or believers in magic realism would deny that Brexit has been a massive failure. Xenophobia is not good for business, you can keep chanting We want our sovereignty back until you are blue in the face but it ain't gonna change anything.
Scott Wilmot
Scott Wilmot Nov 30, 2022 12:52
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world leaders, politicians, greed and corruption are to blame. not brexit. the whole world is playing the same game and the working class are suffering.
Sugar Man
Sugar Man Nov 30, 2022 12:52
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What about the £2.2 trillion of "quantitative easing" the BOE has overseen over the past year and a half
david scott
david scott Nov 30, 2022 12:30
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The same problems exist in euro-land
John Williams
John Williams Nov 30, 2022 12:13
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State the obvious
Ihsan Goren
Ihsan Goren Nov 30, 2022 12:11
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Hard to swallow but that was also part of the plan.
Johnny Bellboy
Johnny Bellboy Nov 30, 2022 12:07
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are they also to blame for the inflation in every other country?
 
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