With a month until the referendum, the Treasury estimates an EU exit would add £220 to the annual cost of food and clothing. We examine the claim.
Falling value of the pound
For the most part, the prediction of price rises comes down to the strong possibility that the value of the pound will fall if the UK leaves the EU. The report published on the government website claims “there is an established link between the sterling exchange rate and prices in shops”.
The Treasury has analysed the predicted depreciation of the pound based on a range of external studies. It estimates that leaving the EU would lead to a 12% average fall in the value of the pound against other international currencies, driven by a predicted period of consumer uncertainty.
An average family of four currently spends £81.40 a week on food and £38.20 on clothing, according to Office for National Statistics figures. The Treasury used an econometric model to calculate the impact on prices of food, drink, clothing and footwear after two years of depreciation.
This model found that the cost of food and drink would increase by £123 during two years of depreciation, and the cost of clothing and footwear – 42% of which comes directly from imports – would go up by £98. The total increase equates to a cost of £221 per year for a family of four by 2018.
Retailers passing on rising costs
If the value of the pound were to fall, there would be upward pressure on the price of imports. According to the Treasury analysis, there is a risk that even higher tariffs could be imposed on imported goods if the UK leaves the EU’s Single Market too.
Consequently, retailers may be forced to further increase prices in order to protect their own margins – passing the cost onto the customer.
As former Waitrose chief executive Mark Price points out, “further pressure on the pound” is likely to result in ”higher prices for consumers”.
Asda president and chief executive Andy Clarke says: “Asda has always been famous for its low prices and, whatever the outcome of the referendum, we remain committed to that pledge. But a vote to leave represents uncertainty, including on prices.”
Risk of damaging relationships and supply chain
According to retail bosses Sir Terry Leahy, Marc Bolland, Justin King and Sir Ian Cheshire, who weighed in on the EU referendum debate this weekend, an exit from the EU would be “catastrophic” for consumers because of the impact on supply chain and relationships with suppliers.
In an article published in The Mail on Sunday, the retail veterans said: “It is impossible for us to see how there could be an exit without an impact […] on the strong relationships we’ve built with our EU supplier partners.
“In the UK we have strong and sophisticated supply chain relationships across Europe, integrated in a way they never were in the past. At the moment, there are no barriers to trade within the EU. In trading with the rest of the world, all sorts of rules and tariffs get in the way.
The retailers argue that an exit vote would necessitate a complete renegotiation of trading arrangements. The increased uncertainly this may cause, and the cost of complications within the supply chain, are likely to be passed on to the consumer.
Potential cost of regulation changes
According to the intervening retail bosses, the UK’s consumers are protected by EU regulation.
“The much-cited suggestion that we will be free of the apparent constraints of over-regulation if we leave Europe is nonsense. If we want to continue to trade with Europe, the rules still apply,” they claim.
“If we left, there is the risk that Westminster would continue to build additional regulation on top of the European laws, making it more onerous, rather than less. So it makes much more sense to have a seat at the table to shape future regulatory change, rather than simply be bound by it.”
Additional regulation too is likely to have a negative impact on prices.