Following last week’s social media storm regarding Unilever’s row with Tesco, we ask whether rising prices in the UK is a positive thing?
The fall in the Pound’s value which has been fueled by growing Brexit concerns will likely have an impact on consumer prices. And given Tuesday’s Consumer Price release for September it could be early signs that prices in the UK are going up, and its likely the consumer will foot the bill.
So what is driving the prices up in the UK and what impact could it have on the economy?
A cheaper Pound makes buying goods and services overseas more expensive. Prior to the UK’s referendum £1 would have acquired €1.30 whereas now, €1.30 would cost you £1.17, a clear 17p difference on every Pound. This may not seem like a lot at face value but in theory, €130 worth of goods would cost you an extra £17, or a €130,000 property purchase an extra £17,000!
But these extra costs for supermarkets are unlikely to be absorbed by company profits, it will be the consumer that will pay the difference on their favorite household items. It will be the poorest families in Britain that will feel the pinch the most.
But what about rising wage growth?
Of course none of this is a concern if wage growth continues to grow in line with inflation. But the reality of Brexit and the complexities that come with it for business are not ideal. The uncertainty that Brexit causes will likely have an impact on job and wage growth unless Theresa May can negotiate a good deal for the UK.
This may also have a significant impact on unemployment rates, as jobs are slacked unemployment rates in the UK could heighten which could fuel weaker consumer spending. A cycle which could lead the UK into a recession.
And as a net importer, the UK engine is far better maintained with a Stronger Pound but as BoE’s Mark Carney has stated, the UK economy is being cushioned by a cheaper Pound from foreign investment.
Data this week that could impact your currency requirements
Tuesday’s Consumer Price release could show strong numbers as a result of a cheaper Pound, but this is not necessary signs of a stronger economy. Thursday’s retail sales are far more important at this stage and will be watched for signs of contraction for consumer spending.
GBP EUR exchange rates could benefit from strong inflationary figures on Tuesday, but longer term gains for Sterling are unlikely. Euro buyers should make the most of spikes in the market.
It’s worth noting that Pound Sterling will be more sensitive to economic releases going forward, as much of the blame seems to be pointed at Brexit, any signs of economic slowdown will be linked to the vote which gives investors more reason to be anxious about where they place their money. Whether this be in the form of consumer or business surveys, or growth forecasts from third party institutes, Sterling has very little room for improvement whilst the economy is being hammered with recession warnings.
With all the attention on the UK’s vote to leave the EU, it would appear that investors have forgotten about the warning signs for the US economy. May’s Non-Farm payroll figures saw sharp drops to its lowest levels since 2010 which raises alarms for employment. Today’s release is expected to outperform May’s figures but not to levels seen in the early months of 2016.
Last Thursday (known as ‘Super Thursday’ due to the large volume of economic data released) saw the Bank of England (BoE) release a report cutting growth forecasts from 2.5% down to 2.2% for 2016, whilst also cutting growth forecasts for 2017 down to 2.3% down from a previous figure of 2.6%.
Over the upcoming week I cannot personally see the Euro’s strong run versus the Pound running out of stream unless we’re presented with substantially weak data coming out of Europe with Friday being the key day as German, Italian and Eurozone Gross Domestic Product figures are due out.