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Post-Brexit effect on inflation

The UK voted to leave the European Union (EU) in a referendum undertaken in June 2016. The separation will be complex and will take many years to complete. However, the effects have been felt immediately.

Since Brexit, the pound has dropped by 18%. After an initial tumble following the result, it fell further in October following Prime Minister Theresa May’s signal that she would use Brexit to tighten borders, even if it means losing access to the EU’s single market on the current terms.

On October 18, the Office for National Statistics (ONS) released its September CPI index, the third full month of data since Brexit. The report stated that in the year to September 2016, inflation rose by 1%. This was the highest in nearly two years. Inflation has largely been pushed up by increased prices in food and clothing, and restaurants and hotels. Pulling inflation down were food and non-alcoholic beverages, which fell by 0.3% between August and September 2016.

There are conflicting arguments regarding the effect of Brexit on inflation. The ONS has played down suggestions that Brexit, and the subsequent fall in the pound, have had an effect on inflation. However, other economists and analysts disagree, forecasting that the falling sterling will continue to push up inflation rates in the coming months, as retailers will need to make up the difference from a weakened currency. Already there is some evidence of this: on 13 October Unilever announced that it would be raising its prices by 10% to make up for the pound. However, it has also been suggested that this is merely an excuse by Unilever to impose extra costs.

At this stage, it is not clear whether inflation has been increased by Brexit, or merely whether the release of the report has coincided with a tumultuous period for the pound, leading to increased speculation.