Brexit: Pound Falls as Inflation Rises
UK inflation rate hit a five and a half-year high this morning, putting renewed pressure on the governor of the Bank of England, Mark Carney, to raise interest rates in November. The fall of the pound since the Brexit vote has pushed prices up, hurting businesses and households.
Investors and thinktanks have warned that unless Britain and Brussels coordinate their attempts and find a common ground in the negotiations, the pound will continue its downward spiral and the British economy will remain vulnerable to further inflationary pressures. The campaign group Open Britain argued that Britain cannot lose access to the single market: “Inflation has increased to 3% -the highest of any major EU economy. It's time for Gov to put Single Market back on negotiating table.”
Wages are squeezed and households suffer
As real wages fall and prices are rising, British workers are suffering a pay squeeze. According to economists this is the second squeeze in a decade, since average wages rose by a mere 2.1% per year in the three months to July. Pensioners are the only lucky ones, since they will see a 3% increase in their basic state pension in April. With the triple-lock introduced in 2011 that ensures that their pensions will rise by the minimum of either 2.5%, average earnings growth or the rate of inflation, retirees are the biggest winners. Since inflation is higher than the wages or the 2.5%, this means that they will see a 3% rise in their state pension next year.
The TUC General Secretary Frances O’ Grady said that getting wages to rise was more important than raising interest rates. She stated that workers and families were struggling: “The government needs to face up to Britain’s cost of living crisis. The squeeze on household budgets is getting tighter by the month. The Chancellor must use November’s Budget to ease the pressure on hard-pressed families. That means giving five million public sector workers the pay rise they have earned. Prices are sky-rocketing. Offering hard-working public servants below-inflation increases would amount to yet another real-terms pay cut.”
Christmas expenses will also be affected by today’s figures. As Hannah Maundrell, the editor of money.co.uk said, Brexit is affecting our wallets: “With inflation at a five-year high there’s no escaping the fact that the luxury of low inflation is well and truly over with prices of goods and services rising left right and centre and the shiny new pounds in our pockets will unfortunately buy you less. Your household budget will be stretched as the cost of transport is creeping up and the price of fuel and food is also on the up. The cost of your supermarket shop is rising too so you must act now to protect yourself from future struggles. Prices are rising faster than earnings and we are heading into one of the most expensive times of year – Christmas, so budgeting is key.”
The Resolution Foundation indicated that UK welfare benefits which aren’t in sync with inflation, will impact on the poorest since low-income families with two kids will lose £315 from the benefit freeze in April.
But the Treasury responded with a hopeful message, saying that they will do as much as they can to help families that are struggling: “We understand that families are feeling the effects of inflation and we are helping them with their living costs. We’ve frozen fuel duty, doubled free childcare for nearly 400,000 working parents and cut income tax for 30 million people. Increases to the National Living Wage are also delivering the fastest pay rise for the lowest paid in 20 years.”
The governor of the Bank of England, Mark Carney, testifying to the Treasury Committee, said that inflation will possibly rise over the 3% in the coming weeks before falling again, and pointed out that the most important thing was the UK and EU future trade deal.
The pound fell after Carney failed to commit to raising interest rates and after the influential thinktank Organisation for Economic Co-Operation and Development (OECD) said that the deadlock in the Brexit negotiations threatened with the possibility of a disorderly exit with catastrophic consequences. In a report, OECD suggested how positive a change would be if Brexit could be reversed by another referendum. It also pointed out that a no-deal Brexit would deduct £40bn from UK economic growth by 2019. However, responding to this, the Treasury said that the referendum result was definite and that we are “leaving the EU and there will not be a second referendum.”