The Bank of England's chief economist, Huw Pill, has warned that Brexit has made inflation harder to control in Britain, leaving the country exposed to "self-sustaining" price rises.
In a recent speech, Pill stated that policymakers have found it tougher to rein in the pace of price rises since the 2016 vote to leave the European Union.
Pill argued that the structural overhaul of Britain's labour and goods markets brought about by Brexit has reshaped the economy in ways the Bank is "still learning about" and "still digesting". He pointed to two main forces driving the trend: the new trade barriers between Britain and its largest trading partner, and the end of the free movement of workers.
UK inflation has averaged roughly 3.6 per cent since the referendum in June 2016, and has dipped below the Bank's 2 per cent target in only one month over the past five years.
The Bank of England's analysis shows that German inflation has averaged 2.5 per cent and French inflation 1.9 per cent over the same period.
Britain formally left the EU in 2020, just before the pandemic shut down much of the economy and triggered a wave of state support that fuelled demand.
Inflation then surged to a 41-year high of 11.1 per cent in October 2022, as savings amassed during lockdown were unleashed at the very moment Russia's invasion of Ukraine sent energy prices soaring.
The Bank's governor, Andrew Bailey, has urged the UK to rebuild its trade ties with the EU, arguing that shrinking the markets Britain trades with inevitably weighs on growth.
Company-level data has suggested that Brexit has knocked around 6 per cent off the UK economy, a figure that chimes with earlier estimates that Brexit dealt a 5 per cent blow to output.
The labour squeeze hits SMEs hardest, with businesses most reliant on EU workers experiencing the largest increases in vacancy rates since the Covid pandemic.
For owner-managers, this is more than an academic point, as the shortages could feed directly into inflation as companies forced to pay more to recruit pass those costs on to customers through higher prices.
The warning from Threadneedle Street carries a practical sting for Britain's 5.5 million SMEs, who may face interest rates staying higher for longer, keeping the cost of borrowing, recruitment and everyday trading elevated well into the second half of the decade.
