The Truth Behind UK Inflation: A Closer Look

There seems to be a common misconception that Brexit has significantly impacted UK inflation. However, upon closer examination, it becomes clear that the factors driving UK inflation are diverse and predominantly unrelated to the departure from the European Union. This article explores the real causes behind inflation in the UK and clarifies the relationship (or lack thereof) between Brexit and inflation.

Understanding Inflation in the UK

UK inflation has been influenced by several global and domestic factors since 2008 and especially during the pandemic. These factors include excessive money printing, the energy price shock caused by the conflict in Ukraine, and supply chain disruptions resulting from the pandemic.

Money Printing and Inflation

One of the primary causes of inflation in the UK is the excessive amount of money printed since 2008. The financial crisis of 2008 led to a series of monetary policies aimed at stimulating the economy, such as quantitative easing. During the pandemic, these policies were intensified, leading to an oversupply of money in the market. An oversupply of money relative to the value of goods and services typically results in higher prices, a phenomenon known as inflation.

Energy Price Shock and Supply Chain Disruptions

The energy price shock from the Ukraine conflict has had a significant impact on UK inflation. When Europe reduced its reliance on Russian energy, it led to a global surge in energy prices. This increase in energy costs has not only raised the cost of living for households but also impacted various other sectors, including transportation and manufacturing. Additionally, the supply chain disruptions caused by the pandemic have exacerbated these issues, leading to further inflationary pressures.

The Role of Public Sector Output

A closer look at inflation data reveals that the UK calculates the value of the public sector’s output differently compared to most EU nations. In the UK, the value of public sector output is based on actual output, whereas most EU nations consider it based on cost. This method leads to a more accurate representation of the impact of falling output on inflation.

For example, if public sector bureaucrats continue to be paid the same amount but their output decreases due to supply chain disruptions and other efficiencies, the cost of public sector services will inflate. This inflated cost will eventually show up in the inflation numbers, as it does in the UK’s GDP calculations. My analysis suggests that a significant portion of the difference between UK and EU inflation can be attributed to this methodological difference.

EU Impact on UK Inflation

The European Union's impact on UK inflation is minimal. The departure from the EU had no significant effect on inflation rates. Instead, global events, such as the Russia-Ukraine conflict and the energy price shock, led to widespread inflation across western countries, including the UK.

Global Economic Factors and Inflation

The conflict in Ukraine led to sanctions against Russia, resulting in an increase in energy prices, particularly oil and gas. This increase in energy costs has been a major driver of inflation, not just in the UK but across the Western world. Additionally, a worldwide drought in 2020, which is being repeated in 2023, has contributed to food price increases. These global factors have had a more significant impact on inflation than any UK-specific events, such as Brexit.

UK Economic Resilience

While the rest of Europe has entered recession, the UK has maintained a strong economy. This economic resilience can be attributed to its effective management of inflation and diverse economic sectors.

Conclusion

In conclusion, the factors driving UK inflation are primarily rooted in global economic and environmental forces. The excessive money printing, energy price shocks, and supply chain disruptions have all contributed to inflation. The UK's inflation rates have been relatively stable compared to many other developed western countries and are largely unaffected by the Brexit event. A deeper understanding of these factors can help policymakers and the public make more informed decisions in the face of economic challenges.