Sterling rises again – what will now happen to inflation?

The pound fell from $1.71 in July 2014 to a low of $1.46 in April 2015, well before a referendum was planned or thought at all likely. There was not a lot of fuss or comment about that.

The pound fell from around $1.45 before the vote in June 2016, to $1.29 after the vote. It fell again to a low of $1.21 in response to the Bank of England’s decision to cut interest rates and have additional Quantitative easing in the Autumn of 2016. Many commentators and many parts of the media made a lot of this fall, and claimed that it would lead to a rapid and damaging inflation. The entire decline of the pound was attributed to Brexit, though as the numbers show much of the decline of the pound had occurred before Brexit was in contemplation and  before the City thought Brexit would win.

Since the low, the pound has now risen to $1.43, more or less back to where it was before the Brexit vote, assisted by the restoration of the interest rate cut by the Bank of England, and to the ending again of Quantitative easing. There has been little media fuss about this, and no commentary saying that inflation should now collapse as the pound has risen by 19% from the low against the dollar. It has also risen against the yen and on the trade weighted.

Isn’t it about time the media invited back all those commentators who got it so wrong again? They were given plenty of airtime to talk the pound down and tell us it would fall further. Instead it went back up.  They went on to argue that a falling pound meant higher inflation as price rises came through. At the time I said they were exaggerating the impact of the pound on shop prices, that the pound could go up as well as down, and that apart from the immediate aftermath of the vote the pound would usually be moved by forces other than the Brexit vote. So it has proved.

Do I think inflation will now fall sharply from the strong rise  in the pound? No, but then I didn’t claim inflation would soar when the pound went the other way. Those who said the pound was the main force on UK inflation have some explaining to do. Or alternatively why don’t they come back on the media and tell us how wonderful it is going to be as prices sink on the back of a stronger currency?

UK Inflation has been more affected by energy prices which have been rising, and by taxes and public sector charges than by movements in import prices.

 

 

This entry was posted in Uncategorized. Bookmark the permalink. Both comments and trackbacks are currently closed.

42 Comments

  1. Duncan
    Posted January 26, 2018 at 5:28 am | Permalink

    We have to view the movement of sterling v other currencies from a foreign currency market perspective.

    The foreign currency markets or certainly those major players who populate that specific market view the UK’s membership of the EU as a positive and any threat to this membership triggers downward pressure on the pound

    Sterling’s recent appreciation from previous falls is simply a strengthening belief by the foreign currency markets that the UK WILL NOT LEAVE THE EUROPEAN UNION

    From a leave voters perspective a strengthening pound is indeed bad news, politically. The foreign currency markets are, day by day, coming to the conclusion that the UK’s membership of the European Union is not at risk

    The internal machinations, jealousies, intrigues and pathetic jostling for position within the governing party have given EU technocrats and power brokers considerable confidence in their ability to manipulate the Conservative party to achieve their aims

    If the UK fails in its quest to take back its independence, autonomy and sovereignty we will become little more than a vassal state forever held in a state of flux

    The recent rally in sterling does suggest the UK’s membership of the UK is not at risk

    Reply The pound has strengthened because the Bank of England is tightening money policy – it put up interest rates, has squeezed consumer and car loan credit, is about to cancel special facilities for the commercial banks and has hinted at further action.

    • Duncan
      Posted January 26, 2018 at 5:30 am | Permalink

      The recent rally in sterling does suggest the UK’s membership of the EU is not at risk

    • Dee
      Posted January 27, 2018 at 3:11 pm | Permalink

      You better hope to God that Brexit does not fail or this Country will be in a state of Civil War, because 17.4 million Brexiteers will not be walked on by you muppets.We are not Eire, We are not Denmark, We will not roll over and accept. We are British and Proud of it. Thank God we had better stuff than you rEUmoaners when we went to war. You would have been with Oswold or Haw Haw. You are pitifull, you do not have the backbone to stand on your own two feet and have to be propped up by your masters in Brussels. We have tried to be Democratic only to find that the majority of parliamentarians do not believe in Democracy except when it comes to Polling Day when they need our vote to get elected. The next step is (protest ed) and we WILL get what we voted for. If you are so enamoured with the EU, go and live there, nothing is stopping you, and the UK is well shot of defeatists like you. etc ed

  2. Lifelogic
    Posted January 26, 2018 at 6:04 am | Permalink

    Indeed.

    The pound would be even stronger had we PM who had a positive vision (even a tiny bit of vision would help), If we went for cheap, on demand energy, fracking, a sensible monetary agenda, far lower and simpler taxes, cut the green crap subsidies and daft vanity projects HS2/Hinkley C etc. and cut down the size of the largely parasitic (and mainly delivering little of any value) government. Cut out expensive idiocies like gender pay gap reporting for example – there is no gender pay gap not entirely explained by the free choices the genders take and different jobs they choose.

    As you say:-

    UK Inflation has been more affected by energy prices which have been rising, and by taxes and public sector charges than by movements in import prices.

    Hammond has just put up Insurance Premium Tax by 20% (to 12%) that alone might add 1% to inflation for many. He is taxing landlords on “profits” they have not even made so they will have to put rents up. He has also put an extra 3% stamp duty on houses (up to 15%) bought to be let pushing rents up again. He has also attacked the self employed again with more back door tax rules and NI changes. Plus we have large increases in council tax to add to inflation. We also have the state sector charging for more and more services (or just closing them completely like libraries & public loos). The largely parasitic state sector with their gold plated pensions are the main cause of inflation.

    Please fire the economically illiterate Philip Hammond. He is as dreadful as Denis Healey (with his tax ’til the pips squeak and 98% income tax). He is also more robotic & dreary. He is meant to be a Conservative too but has zero charisma and no grasp of economics or vision.

    The economy is doing OK but this is despite his idiotic tax borrow and waste, tax complexity & the expensive energy agendas.

    The governments misguided attacks on UBER and the gig economy are also pushing up inflation and costs for industry.

  3. Wizard of Osborne
    Posted January 26, 2018 at 6:13 am | Permalink

    Why? The question is. Why has our TV media gone AWOL of their senses? Why was Chancellor Hammond able to get away with but a cheeky grin when challenged on some of his pre-23rd June 2016 economic predictions of meltdown and doom? No further vacancies for a wholly inexperienced newspaper editor?

    • Lifelogic
      Posted January 26, 2018 at 7:36 am | Permalink

      Hammond really must go. His tax system is absurd, absurdly complex and getting worse. What happened to the office of tax simplification? All still being well paid no doubt?

      Yet HMRC cannot even be bothered to reply to letters or answer the phones.

      Up to 15% stamp duty (a turnover tax) is absurd, he is still ratting on the £1M IHT promise of 8(?) years back (the threshold is about 20 times that in the USA) , he is taxing landlords (thus tenants) on taxes they have not even made (similarly for CGT that is no longer inflation indexed), a 20% increase in IPT (insurance) tax, more attacks on the self employed every day, a sick joke of an NHS, an absurd auto enrollment pension scheme, an bonkers new apprentice tax, his shoot yourself in the foot attacks on the non doms and other investors in the UK and bonkers green crap subsidies everywhere. He is still increasing the national debt rapidly and wasting it hand over fist on total absurdities and a hugely over bloated government delivering little of any value.

      The man is an economic menace, even without his absurd remainiac tendencies and his project fear agenda.

      • Hope
        Posted January 26, 2018 at 10:23 am | Permalink

        HMRC allowed to target leave donors! That is political. Heads should role. There is no excuse why Hammond should not be sacked, his budgets were useless, he has given numerous pro EU comments against govt policy. Anything Johnson said was in govt policy yet rebuked! Tells you all you need to know. Davis and Walker confirming the U.K. U dear control of EU and ECJ.
        Phase one, deal or not regulatory alignment applies, i.e. Staying in the single market. May telling a German paper we want to feel our decisions are made here, against govt policy because we voted to leave to make our devious here not feel as though they are.

    • alan jutson
      Posted January 26, 2018 at 8:40 am | Permalink

      Wizard

      Afraid the news media now want to make the news with comment rather than simply report it.

      Kay Burley got absolutely savaged in a live interview with Former US Ambassador John Bolton recently for making unfounded and disparaging comments about President Trump recently.

      Just google “Kay Burley John Bolton Interview” if you want to view.

      More people should take up the challenge and the presenters may get the message.

      • Lifelogic
        Posted January 26, 2018 at 1:01 pm | Permalink

        Google the Channel 4 interview on gender pay with Jordan Peterson.

        Where do they get such very silly, innumerate and irrational interviewers from? It is really quite funny to listen to but pathetic too. Peterson remains remarkably polite throughout despite her very silly line of questioning and total failure to listen or think.

    • Iain Moore
      Posted January 26, 2018 at 9:16 am | Permalink

      Indeed they have gone AWOL, if not lost their marbles, as could be seen where the Today programme thought one of the most pressing subjects to press the CEO of Lloyd’s bank on was the Presidents Club dinner.

  4. Mick
    Posted January 26, 2018 at 6:15 am | Permalink

    Exactly but we’re not getting this put out to the public, but you can bet your bottom dollar if it was the other way round and the pound had collapsed it would be head line news all over the news and tabloid bulletins
    https://www.express.co.uk/news/politics/910077/BBC-Brexit-bias-anti-EU-views-News-watch-euro-sceptic-referendum
    Who’d have thought 🙄😄

    • Lifelogic
      Posted January 26, 2018 at 7:45 am | Permalink

      Not just the BBC’s Brexit bias. Also the FT, ITV, channel 4 and 5, the CBI, the IoD to a lesser degree, most “charities” (many of which are not really charities at all in any real sense), almost all of academia, most of the state sector in general, Hammond and about half the “Tory” MPs and much of big multi-national business (as the EU regulates the smaller competitor out for them), most farmers and many other rent seekers.

  5. Mark B
    Posted January 26, 2018 at 6:20 am | Permalink

    Good morning.

    “Four legs good, two legs bad”

    What all these comentators tell us is which side of the ideological fence they sit. That’s it !

    As comodity prices are done in US Dollars the fall and rise of Sterling against that currency is quite important. It affects factory gate prices but, that is not only the only thing. Taxes, wages, interest rates, business rates and (over) regulation have their costs. So too does excise duties but that is paid by the consumer in the importing country and has no baring on the cost of the price of goods out of the factory.

    But whether the pound goes up or down it is the cost of basics that affect everyday consumers that matter. And these seem to be rising and rising. Why ?

    • agricola
      Posted January 26, 2018 at 9:54 am | Permalink

      Prices rise because the supermarkets judge that they can get away with it. I can buy six inch long prawns (langostinos or gambas ) at about Euros 8.90 per kilo in Spain. They are imported from South America and probably cost Mercadona no more than Euros 4.0 per kilo. In UK supermarkets the scruffiest two inch long prawns cost over £20.00 per kilo. You are being ripped off in the UK.

  6. Sir Joe Soap
    Posted January 26, 2018 at 6:39 am | Permalink

    It’s worth making the point though that this volatility in the £ since the EU vote has been exacerbated by BOE actions rather than steadied by them
    Were there other reasons for reducing then tightening interest rates? Employment and GDP? I can’t really think BOE actions affected those either except perhaps to tighten the labour market slightly and add commensurately to immigration and the consequent GDP though not per capita GDP. Perhaps we should ask a BOE committee member to comment?

  7. DougM
    Posted January 26, 2018 at 6:47 am | Permalink

    All ver well put JR but with the swi gs and rounabouts i don’t think it adds up to a whole lot..how will it be 30th march 2019 if we don’t get the agreement we want?

  8. DougM
    Posted January 26, 2018 at 6:50 am | Permalink

    Swings

    • agricola
      Posted January 26, 2018 at 9:56 am | Permalink

      Correct, movement is the essential of profit for the exchange dealers.

  9. DougM
    Posted January 26, 2018 at 6:51 am | Permalink

    How will it be if we don’t get the bespoke agreement for services we want?

    • agricola
      Posted January 26, 2018 at 9:58 am | Permalink

      Then many in the EU will be up the proverbial creek minus paddle.

  10. Stopped Ticker
    Posted January 26, 2018 at 7:00 am | Permalink

    We used to hear from the BoE every other day. Then shtum, as we saw the tide turn people waking morning after morning or evening after evening depending on shifts, finding themselves surprisingly still alive, still in a job, and stomachs too satisfied for a full breakfast. And the European migrants still pouring into “the worst economic situation since 1914″ or even ” 1750″ according to Karl Marx Fund Management Co-op & Brothers Grim ”
    Of course, not a word from the leftie-liberals about Trump’s tax reforms giving ongoing tax reductions to “The Workers” plus $1000 in-the-hand gifts to millions of workers from employers due to massive reductions in company taxes.
    Hard for anti-capitalists like Labour explaining money just downright handed out to workers without a red flag being waved by the bearded bike clipped trousered ones from a Uni campus.

    • Sir Joe Soap
      Posted January 26, 2018 at 7:56 am | Permalink

      Carney now preparing his ground for the economy to do better in any post-Leave scenario by saying all possibilities lead to growth, without commenting on differences between outcomes. Of course, it needs his immense skill to deal with each of these. A gradual turn around to being able to say in a year or two’s time that he always said the UK could handle a WTO leave and benefit?
      Weasel.

      • Helen Smith
        Posted January 26, 2018 at 5:20 pm | Permalink

        I’m sure he will tell us it was his cutting of interest rates that saved the day, personally I think it was done out of pique and spite.

  11. Lifelogic
    Posted January 26, 2018 at 7:17 am | Permalink

    I see that sky are planning to stop satellite transmissions. Hopefully we can then clear away all those millions of rusting satellite dishes away and while we are at it why not end all the ugly estate agents boards too?

    No real need for them now as with the internet you can see what is for sale on any road anyway in minutes. Many boards sit there permanently as free adverts for estate agents.

    • fedupsoutherner
      Posted January 26, 2018 at 1:50 pm | Permalink

      LL Please don’t get rid of all the satellite dishes. We cannot receive analogue television where we are and our internet speed is crap. Some of us are forced to live in the dark ages in a third world country called Scotland.

  12. formula57
    Posted January 26, 2018 at 8:14 am | Permalink

    Given “UK Inflation has been more affected by energy prices which have been rising…” and that the USA engineered a stronger recovery than elsewhere in reliance upon a cheap energy policy, why does our inept Chancellor of the Exchequer not implement (albeit nearly fifty years late) your party’s promise articulated by Edward Heath to “cut prices at a stroke” by nil rating for VAT purposes domestic energy costs?

    Alas, we likely do know why he does not, but then that raises the question of why is he still in office?

  13. am
    Posted January 26, 2018 at 8:17 am | Permalink

    yes, will unilever bring back down the price of marmite.

  14. hans chr iversen
    Posted January 26, 2018 at 8:38 am | Permalink

    John

    It would be useful if we knew how much was energy prices, taxes and then the falling pound?

  15. Old Albion
    Posted January 26, 2018 at 8:41 am | Permalink

    All the so called experts who predicted Armageddon should we VOTE to leave the EU, have disappeared.
    One or two are still hiding behind ‘yeah but, we’re not actually out yet’

  16. agricola
    Posted January 26, 2018 at 8:42 am | Permalink

    Frankly I am not too fussed about the Pound and the Dollar though I do accept that much World trade is done in Dollars, so it is relevant. My interest is in the Pound /Euro exchange rate which has also edged up in the last few days. Reason is it affects my income and I cannot be more selfish than that. The EU is financially a basket case due largely to the Euro and the failure of the eurocrats to sort out the national economies within it. I maintain it should be around E 1.50 to the Pound Sterling and probably will head that way once we depart. It will then only be where it was when they invented the Euro. As to the media, it is just one of the tools they use to sell the story they wish us to believe.

    • hans chr iversen
      Posted January 26, 2018 at 4:57 pm | Permalink

      Being a Nordic citizen I cannot see that we are anything close to an EU basket-case, but maybe i got it wrong for my part of Europe and you can explain to me why we are a basket-case?

  17. oldtimer
    Posted January 26, 2018 at 8:49 am | Permalink

    Sterling valuation is not much more than a by stander in the ups and downs of the US$ or perhaps a bobbing cork would be a better description. It is much more vulnerable to US policy decisions and the desire to devalue the $ versus the yuan than anything the Governor of the Bank of England might do or say. Nevertheless, it was used, by Leavers, as a stick to beat Brexiteers; but it was a weak stick, easily broken. That is why we no longer hear much about it.

  18. Bert Young
    Posted January 26, 2018 at 8:56 am | Permalink

    Above all silence the crackpot Carney . He is joined at the hip with Hammond and will not stray from the views emanating from the Treasury . I am very pleased that Jacob Rees Mogg has used his new appointment to emphasise the case for a “clean” exit form the EU . Messages coming from him – and this blog , are strong reminders to Theresa to stop being a compromiser and deliver us a clean dignified sovereign country . Time is running out for her to realise that she will not be able to win the next General Election and that she should step aside soon enough for a replacement to establish a position . As each day passes the opportunity is lost to develop at the expense of a divided Labour Party . Brady has a job to do .,

    • Helen Smith
      Posted January 26, 2018 at 5:23 pm | Permalink

      Certainly it is madness to think she could lead the Tories into another GE? Corbyn is nearly 70. When he goes so does the cult of Corbyn, the Tories need to hold their nerve, find someone with some character, who believes in leaving the EU properly and they will have a chance.

  19. Iain Moore
    Posted January 26, 2018 at 9:12 am | Permalink

    Its better than just than Sterling recovering against the Dollar making energy and raw material costs cheaper, we also have the benefit of the Pound Euro rate which remains competitive, where we have a large deficit . So its a double whammy of benefits.

  20. Sakara Gold
    Posted January 26, 2018 at 9:14 am | Permalink

    The recent increase in the value of the pound has been the result of the dollar collapsing when valued against a trade-weighted basket of global currencies. Cable has, however increased slightly against the Euro since it’s low in September (from 1.08 to 1.14) in response to the more positive tone of the Brexit negotiations and has also risen against the swiss franc; as the dollar sinks in value (due to the enormous level of additional borrowing required to finance Mr Trump’s tax cuts) investors move liquidity into other currencies.

    The recent modest increase in BoE interest rates has indeed made Sterling more attractive to investors

  21. Epikouros
    Posted January 26, 2018 at 9:52 am | Permalink

    The concern we should be having is the strengthening pound going to effect manufacturing. It has seen some better times lately probably because of a weakening pound. It is a perennial problem with manufacturing that some of the captains of industry are reliant on the pound for their success or otherwise because they fail to increase investment and more efficient processes sufficiently to be able to compete under any conditions.

    The evidence suggests that the exchange rate of the pound does affect the level of inflation but it’s recent fall does not appear to have affected it very much if at all. For remainers to claim that recently that the exchange rate downwards is because of Brexit and then say nothing when it rises again is at the least disingenuous. However we know it is downright deceitful propaganda as we know that so much of their other forecasts and pontifications on Brexit are equally so. Yet they continue to spew out the same rubbish. How they keep a straight face amazes me. It can only be that their delusion knows no boundaries.

  22. APL
    Posted January 26, 2018 at 11:11 am | Permalink

    JR: “Sterling rises again – what will now happen to inflation?”

    Nothing. Since it’s part of the policy ( of bankrupting the citizen ) that the administration you support peruses, 2 – 3 % devaluation of every citizens assets and earnings each year and every year.

    That’s not too much of a problem for a class of people who can just shovel more tax revenue from everyone else in the economy into your own pockets.

    But its a big problem for the lowest paid and those on fixed incomes.

  23. Rien Huizer
    Posted January 26, 2018 at 11:59 am | Permalink

    The trade weighted exchange rate (the only one that counts for the GDP deflator but not necessarily and immediately for the CPI (different basket) has been directionally horizontal for about 16 months now, but with a great deal of volatility. Other factors may be driving the CPI further but of course, asuming that there are no further unexpected events (like a breakdown of negotiations a couple of months from now, inflation should drop below the BoE’s 2% boundary. That would also leave some room for contingency policy by postponing further increases in the policy rate for a while. Of course, the whole thing remains fragile especially the matter of how to deal with systemic risk issues post exit. But that may be too wonkish for this forum.

  24. John Dodds
    Posted January 26, 2018 at 12:51 pm | Permalink

    Whether she stays or goes a tremendous amount of damage has been done and time wasted by the PM and her remainer acolytes.I would like to think that she will suddenly surprise us all by saying “NO DEAL” if we don’t get what we want.

  25. Denis Cooper
    Posted January 26, 2018 at 2:14 pm | Permalink

    Before attributing any change since the EU referendum to the referendum or to the result of the referendum it is necessary to look at what was happening before the referendum, in fact preferably before the election of the Tory majority government in 2015.

    In most of the cases which are being selectively highlighted by the despicable dishonest disloyal pro-EU anti-democratic Remoaner faction what we have been seeing since the referendum reflects little more than a continuation of pre-existing trends.

    Of course it is too much to expect the Brexit department to point this out.

  26. The Prangwizard
    Posted January 26, 2018 at 3:23 pm | Permalink

    And why do the media, broadcast and print, still use the word ‘eurosceptic’? Those who want well out of the EU represent the majority of the voting population. The word is used as it was in the past when there was only a minority for leaving. It is their attempt of course to portray our representatives in the same kind of light now as they did then, critically and of of touch. The mediacontinue to demonstrate their contempt for democracy.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page