Last orders for low inflation?

For the last two years or so, UK households have been in the midst of what has been dubbed a consumer sweet spot – low inflation aided by a sustained period of falling food, fuel and petrol prices. But times are changing. The significant fall in the value of the pound has started to fuel import price inflation – while exporters benefit from a weak pound, it is worth remembering we import more than we export. But it will be well into 2017 before we see the main impact of sterling’s depreciation on consumer prices. Continue reading

Sterling taking a pounding but will we be trumped by inflation?

When people cast their EU Referendum vote on June 23, I suspect not many would have seen it as a ballot on the price they would pay for their next iPhone. But, in a sense, it was, as the proceeding fall in the value of the pound Sterling has had wide-ranging impacts for the economy – both good and bad – including the price we pay for goods. Continue reading

Chart of the Month: Sterling at lowest level against dollar since 1985

Chart of the month - sterling

Following last Friday’s EU-Referendum result, sterling suffered a record one-day loss with the pound dropping 8.1% against the US dollar to $1.367. This record one-day decline was almost double the 4.1% fall on Black Wednesday in 1992 when the UK exited the Exchange Rate Mechanism (ERM). This also took the pound to its lowest level against the dollar since 1985.

On Monday, sterling fell sharply again and briefly touched a low of $1.312 before closing one cent higher at $1.3225 at Monday’s close. The peak-to-trough fall from last Thursday night’s high of $1.5018 (after the polls closed) to Monday’s low represented a cumulative two-day decline of 12.6%. This represented the sharpest two-day decline on record.

Sterling has subsequently regained some of its recent losses and at lunchtime today (Thursday) was changing hands at $1.3450.  Looking ahead, a further fall in the value of the pound is anticipated with the prospect of fresh 36-year lows and a move below $1.30.

A fall below 1985 levels is not expected as the low back then was $1.0520. The recent falls will boost price competitiveness for UK goods and services (including tourism) within the US market.  However, the cost of US imports and holidaying within the US will be much more expensive.

Chart of the Month: Sterling job in a crisis

Chart showing the Sterling / Dollar Exchange Rate between 1975 and 2015

Last week was the largest weekly fall in sterling in seven years. Sterling has been this year’s worst performing major currency against the dollar. The pound dipped below $1.40 for the first time since 2009 and hit a low of $1.3836. So far this year sterling has fallen by over 6% against the dollar and is down almost 13% relative to its high last June ($1.593). A number of factors have been weighing on sterling sentiment in recent weeks.  These include: market concerns over the scale of the UK’s current account deficit and financial markets pushing back their expectations of when the Bank of England will begin hiking interest rates. Meanwhile the forthcoming EU referendum on the 23rd June is also a source of political risk and financial market volatility.

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