The Bank of England will publish its inflation report next Thursday, and this time it will get even more attention than usual.
Brexit is being felt in prices more and more now, with the cost of grocery bills jumping and prices for essentials going up. The phenomenon of “shrinkflation” is in full swing as well; many products are mysteriously losing weight, but maintain their price.
No matter how much it would like to help (or to meet its inflation target), the Bank of England cannot do anything to prevent prices from rising. In fact, to be more accurate, it could, but it will not. The central bank could raise interest rates, stopping the pound’s depreciation — but if it does this, the housing market would crash.
You wouldn’t know it looking at the fact that the notorious “Walkie-Talkie” building in the City — the one that burns people’s cars down below if the sun is shining — has been sold for a record price to Hong Kong investors, but there are already signs of trouble in the property market.
London’s estate agent Foxtons said that the EU referendum weakened the capital’s real estate market, by reducing sales transactions substantially. Uncertainty about the future of London’s vibrant financial sector is a big reason for the slowdown. Tension over EU residents’ rights is another.
If the finance sector is hit by the EU’s insistence that euro-denominated derivatives trading should be done in the EU, many jobs and auxiliary services might have to move, which means demand for housing in the capital would shrink.
Another blow could come from the departure of EU residents and even Britons disappointed by the way the country has been transformed by the referendum. Instances of abuse against European citizens have intensified even in London, where the majority of people voted to remain in the EU.
Many are already leaving, either saddened by the way they are treated or because they fear that the UK will experience an economic decline that will make their lives miserable.
The issue of Brexit has been so divisive that it crops up in the most unexpected walks of life in the UK, like in this landlord’s advertisment for a property to let, where he specifically says the tenants must not be “Brexit voters.”
After last year’s referendum, Remain voters were accused of fear mongering because the economy did not crash immediately after the vote. On the contrary, exports took off due to the weak pound and consumers rushed out to spend, most likely aware that inflation will follow.
Now that it is becoming quite clear that Britain will actually leave the European single market, its biggest export destination, those fears are close to becoming reality. The Bank of England can hardly stop what’s coming.
Other things to watch for this week:
— Eurozone consumer price inflation for July, unemployment for June
— US PCE core inflation for July
— Eurozone second-quarter GDP