Brexit = stagflation?

Just about everyone except the most blinkered observers (hi there, Jacob Rees-Mogg) recognizes the damage that Brexit is likely to cause to the UK economy and society.  Loss of jobs if free trade is not maintained?  Check.  Evisceration of London's leading role in European financial markets?  Check.  Possible unwinding of the Good Friday agreement that has produced something like peace in Northern Ireland?  Check.  Strains on social services as key EU workers return home, to be replaced by embittered, elderly expat Brits displaced from the Costa del Sol?  Check.

Now we have the Governor of the Bank of England, Mark Carney, weighing in on the risks to the overall economy. In a remarkable speech at Mansion House,  Carmey has warned that the risks that Brexit poses to the health of the UK economy are so severe that this is "not the time" to start adjusting monetary policy.  He baldly states that "the Bank cannot prevent the weaker income growth likely to accompany the transition to new trading arrangements with the EU", but that it can influence how "the hit to incomes is distributed between job losses and price rises".

Quite simply, this means that the Bank is abandoning its 2 percent CPI target for as long as the Brexit uncertainty exists.  As recently as October 2015, UK year-on-year inflation was virtually zero.  It edged up in the months after that, but by the time of the Brexit vote last June it was still below 1 percent.  Since that vote, inflation has been rising steadily, and in May reached 2.7 percent, the highest level seen since the first quarter of 2012.  Under normal circumstances the Bank would have begun raising rates some months ago, but Carney is signalling that he can't and won't be doing any such thing, given the very delicate state of the economy.

It's a dismaying prospect -- little or no GDP growth accompanied by rising prices, and the Bank almost powerless to do anything about either.  The term "stagflation" was regularly used to describe the UK back in the 1970s.  Although nobody now expects inflation to rocket up to 20 percent as it did back then, the word itself may come back into common currency.

A final thought:  Governor Carney needs to watch his back.  The more rabid Brexiteers, led by the aforementioned Rees-Mogg, were after his scalp when he dared to speak out during the referendum campaign.  Today's comments, with the die already cast, may be even more provocative.  Come to think of it, Chancellor of the Exchequer Philip Hammond, who seems to share many of Carney's concerns, might also want to polish up his CV.