Working Paper: CEPR ID: DP14176
Authors: Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson
Abstract: This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher 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. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0.29. We estimate the Brexit vote increased consumer prices by 2.9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.
Keywords: Brexit; Exchange Rate Pass-through; Import Costs; Inflation
JEL Codes: E31; F15; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| depreciation of the sterling (F31) | increase in consumer prices (E31) |
| Brexit vote (F69) | increase in consumer prices (E31) |
| increase in import share (F10) | increase in inflation rate (E31) |
| depreciation of the sterling (F31) | complete pass-through of import costs to consumer prices (F10) |
| higher import shares (F10) | larger inflationary impact (E31) |
| higher expenditure on products with elevated import shares (F10) | disproportionate impact on households in Northern Ireland and Wales (I14) |