Brace for more pain ahead after a plunge in sterling

A depreciation drives up inflation by making imported goods more expensive. For example, a barrel of oil priced in dollars will be more costly because the pound has fallen. A slump can also nudge up price growth by boosting demand for UK exports as they become more competitive.

British households were squeezed by a pound-driven bout of inflation after the Brexit referendum. But the impact of the currency’s woes are less obvious today as everywhere is hit by soaring energy and food costs.

Martin Beck, chief economic adviser at EY Item Club, says the pound’s fall is a “double edged sword” by making inflation worse but helping exporters.

“We’re unfortunately in a world where you’ve got the pound layering on top of all those inflationary forces,” he says.

“It’s now adding to all the pressures which are bringing inflation up.”

However, Beck adds that a slide in the pound will also help exporters by making their products more competitive, as well as British suppliers competing with importers in the domestic market.

Some British business owners have found themselves on the other side of this. “If you’re buying tuna in dollars, like we are, then it is going to cost more money,” says one canned goods importer.

“Sweetcorn, that’s another thing we’re buying in dollars. All our costs have gone up, and then there’s just this added currency hammer.”

Similarly, according to cheese retailer La Fromagerie, buying cheeses from continental Europe in euros has meant it is having to pay more.

“Just this morning, I was getting more emails about price increases,” says owner Patricia Michelson. “One was a French supplier, saying that they can’t keep up with the rate of cost increases in transport and packaging, and another was from our Spanish supplier, saying they’re in the same predicament. They said it was just getting worse.”

Michelson says local producers also take a hit from higher import costs, though. “It’s affecting prices of English cheese as well,” she says.

“A lot of farms are buying products from the European Union. Things like feed, serum, packaging. We heard this morning from an English producer down in Devon who was saying they’re having to increase their prices every three months now. It’s all kicking off.

“By September, I should think that we’ll see a big shadow over how we actually buy.”

Already, things have become pretty dicey. The pound has had a torrid year on currency markets as recession fears have mounted and confidence in the UK economy has sank. Speculators have also ramped up their bets on sterling falling further and currently hold a £3.3bn wager against the currency.


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