Government’s Brexit dance is maiming the pound
Inflation is coming to eat the pound in your pocket. Today, data for September is expected to show that prices in the UK rose by an annual 0.9 per cent rate, up from 0.6 per cent in August, driven by energy and food prices.
However, the full impact of the recent plunge in sterling will not be evident in this consumer price index reading as the data was collected several weeks ago.
Sterling's dramatic fall across a range of currencies will take some time to feed through. When it does, foreign import prices will get more expensive. Producers and retailers will have to accept higher costs, which they eventually pass onto the consumer.
Economists are predicting that inflation will breach the Bank of England's two per cent target next year.
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Inflation is not necessarily a bad thing in itself. It can, for example, indicate a period of high wage growth in prosperous times. In usual economic conditions, rising inflation could provide a boost for sterling because it may put pressure on Threadneedle Street to raise interest rates.
However, these are not normal economic conditions. Brexit aside, real wage growth has been at best anaemic for years. Sterling has fallen more than 17 per cent against the dollar and euro since January. With interest rates nudging zero, the Bank of England has very little wiggle room left.
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Its governor Mark Carney has said that it could look through a sterling-induced period of high inflation, but a higher cost of living could impact consumer spending and that is bad for the economy.
Talk of 1970s style stagflation – rising inflation and low economic growth – may be alarmist, partly because inflation can be fickle. The upward pressure on the cost of living from a falling currency could ease off if sterling recovers its poise. If it settles at current levels, inflation's rise will be a one off which soon exits stage left.
But Downing Street should not be complacent. The government's Brexit dance has exacted a heavy toll on the pound. We now have a timetable for Article 50. With rumours of so-called hard Brexit weighing on sterling, clarity on the stance the UK intends to take – and a united front in cabinet – is also needed, and soon.