Free DP Download 12 December 2019 - BREXIT RAISED CONSUMER PRICES BY 2.9 %, COSTING THE AVERAGE HOUSEHOLD £870 A YEAR: Impact of the sterling depreciation and exchange rate pass-through

Thursday, December 12, 2019

Holger Breinlich, Elsa Leromain, Dennis Novy, Thomas Sampson         
CEPR DP No. 14176 | 08 December 2019

Brexit has already pushed up UK inflation, according to a new CEPR study by Holger Breinlich and colleagues, which assesses the consumer price effects of the depreciation of sterling after the UK voted to leave the European Union in June 2016.

The authors find that the Brexit vote led currency investors to anticipate that barriers to trade and immigration between the UK and the EU would rise at some unknown future date, while also increasing economic uncertainty in the UK. This shift in expectations led to the depreciation of the pound. Among the findings:  

  • The fall in sterling was unanticipated, sharp and persistent and, unlike most sudden depreciations, affected the currency of a major industrialised economy.
  • Following the referendum, the increase in inflation was higher for product groups with larger import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production.
  • The authors do not reject the hypothesis that there is complete pass-through of import costs into consumer prices which, for the UK, implies an aggregate exchange rate pass-through of 0:29.
  • Producer price index inflation was higher in sectors with a larger share of imported intermediates in production costs.
  • The Brexit vote increased consumer prices by 2.9%, costing the average household an estimated £870 per year.
  • Increases in the cost of living were similar across households in different deciles of the income distribution, but not across regions. London suffered least, while Northern Ireland and Wales were worst hit.

Figure 1: The depreciation of sterling after the 2016 referendum

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