Post-Brexit Britain Faces a Pay Squeeze
Don't tell Tiny Tim, but even if Brexit hasn't put a damper on Christmas 2016, next year might be a different story. Come January, Britons will pay 5 percent more for their Lego sets, as the Danish company raises prices in response to the pound's decline in the wake of the U.K. decision to leave the European Union. And if the Office for Budget Responsibility is right, incomes won't increase by anything like enough to match the higher prices of consumer goods.
One of the few economic consequences of Brexit that both sides of the debate agree on is that it will stoke inflation. Figures released on Monday show that consumer prices jumped by 1.2 percent in November, the fastest pace in more than two years. Import prices surged by almost 15 percent, the biggest annual increase in five years.
The OBR, an independent body that scrutinizes public finances to ensure the government "can't mark its own homework," is predicting that consumer prices will drift higher. Its November forecasts show inflation reaching the Bank of England's 2 percent target in the first quarter of next year, and then hovering at about 2.5 percent through 2018. So by the end of next year, prices will be rising faster than incomes:
As the chart suggests, Brits still haven't recouped what they lost between 2010 and 2014, when rising prices outpaced wage gains by more than a percentage point. So far this decade, the average increase in wages has been just 1.8 percent, while inflation has averaged 2 percent.
And while you might expect faster inflation to force employers to boost compensation, Bloomberg Intelligence economist Dan Hanson says history suggests it won't. "When inflation has previously been boosted by a decline in the pound, the temporary surge in price growth has had no obvious effect on wages," he says.
The increased cost of some consumer goods will be nothing compared to the burden of more expensive mortgages. Prices in the futures market suggest there's a 10 percent chance that the Bank of England will raise interest rates by August, rising to 30 percent by the end of next year. Lenders are likely to anticipate tighter monetary policy by pushing up borrowing costs in advance of central bank action.
The "sunlit uplands" promised by pro-Brexit campaigners will instead start to look economically gloomy, threatening to undermine consumer confidence. The consensus view of economists is that the U.K. has a 25 percent chance of slipping into recession in a year; that's already up from just 5 percent prior to the referendum, and may edge higher if the risk of stagflation -- the combination of rising inflation combined with rising unemployment -- is perceived to increase.
There is a strong argument that financially disgruntled voters were behind the swing to Brexit (and indeed the 13 percent vote for the anti-immigrant, anti-EU U.K. Independence Party in 2015). If so, the scene could be set for increased political turbulence as the slice of the electorate already dubbed the JAMs -- Just About Managing -- finds itself suffering the economic consequences of Brexit even before the U.K. has actually exited the EU.
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