‘No deal’ Brexit could add 1pc to inflation under WTO rules
THE prices of milk, meat and clothes could all soar if Britain fails to strike a free trade deal with the EU, as tariffs at the border would add to costs facing hard-pressed families.
A “no deal” Brexit risks adding more than 1pc to inflation because it would leave the UK using World Trade Organisation rules and taxes, according to new research. Dairy prices could rise by 8pc, meat almost 6pc, clothing 2.4pc and vehicles 5.5pc, the study published by the National Institute of Economic and Social Research said.
Prices are currently rising faster than wages, harming families’ spending power. That situation is forecast to gradually reverse over the next year.
However, trade on WTO rules in the event of failed negotiations with the EU will add extra taxes on imported goods from March 2019 and potentially cause real wages to fall again.
Poor families would be the most affected, according to the research carried out by analysts at the UK Trade Policy Observatory at the University of Sussex and the Resolution Foundation.
The researchers said: “The overall increase in price in the affected goods is estimated to be 2.7pc, increasing the overall cost of living 0.8 to 1.1pc for a typical family, with the unemployed and families, those with children and pensioners hit hardest. This may seem a small number, but in a country in which the real incomes of ordinary families have been stagnant for several years, a loss of this order would have a significant effect on welfare.”
They believe this is likely to be an underestimate as it does not consider the effect of a no deal Brexit on the cost of services, nor the impact on other suppliers’ costs, or the administrative and regulatory frictions associated with the lack of a trade deal.
A separate study from NIESR, meanwhile, warned a public sector pay hike could have knock-on effects on private sector pay, and then on to inflation.
If pay goes up without any increase in productivity, it risks simply adding costs into the economy, pushing up prices and adding to pressure on the Bank of England to raise interest rates.