Yahoo Finance Brace for more pain ahead after a plunge in sterling
At Rakusen’s, one of Britain’s oldest cracker businesses, there are certain things that simply cannot be changed. “We have to run the ovens to cook the biscuits,” joint owner and managing director Andrew Simpson says. “And we can’t just put less wheat in all our crackers.”
There, like every other food business in Britain, costs of energy and ingredients have proved a particular burden in recent months. Yet, Simpson says there has been another factor which has piled further pain on businesses.
“All of our major commodities inputs are priced in dollars or affected by the value of the dollar,” he says. “Inevitably, the devaluation of the pound puts cost into the business.”
For Rakusen’s, even buying locally does not solve the issue. Its wheat is grown in the north of England and is bought from a flour mill 30 miles down the road. But, Simpson says, “it’s effectively priced in dollars”. “The grain is a global commodity. And if we're not prepared to pay a competitive price for it, even though it comes from the north of England, that grain will be sold to somebody else.”
Rakusen’s is not alone in feeling the pressure from currency movements. The effect of the pound’s slide goes much deeper. Economists are warning that already high inflation is being given an added boost from the slump in sterling as confidence drains out of the UK economy.
The pound’s troubles could add as much as 1.75 percentage points to inflation in the coming years, with price growth expected to peak in October at 11pc.
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.
The pound has slid by more than a tenth against the dollar to $1.21 this year and has suffered a 7pc drop against Bloomberg’s trade-weighted basket of currencies. The Bank of England’s own measure of sterling’s performance against a broad range of currencies suggests a smaller 4.4pc drop.
Every 1pc fall in the pound versus a basket of currencies typically pushes up inflation by 0.25 percentage points.
Paul Dales, chief UK economist at Capital Economics, says that if the pound fell by 7pc, this would add 1.75 percentage points to CPI inflation in total over the next four years.
Around 50pc of that, 0.8 points, would come in the first year.
The hit to customers has already been tangible. The use of the dollar as the currency of choice by international oil markets means that prices at the pump in Britain are higher than they otherwise would have been. According to figures from Bloomberg, UK petrol prices last month were 4pc above where they would be if the dollar-pound exchange rate had stayed where it was at the start of the year.
All this inflation is filtering over into British businesses. Clive Watson, chairman of UK pub chain City Pub Group, says the weakness of the pound “is pushing up prices across the board”.
“The cost of food has rocketed, the cost of beer is rising as imported barley and hops ingredients are more expensive. Petrol costs have soared, increasing distribution costs,” he says.
At City Pub Group, food costs are up 15pc. Beer brewed abroad costs the chain 10pc more than it used to. Beer brewed in Britain is 8pc more expensive. Watson says City Pub Group is doing whatever it can not to pass that cost on.
“We know our customers have their own cost pressures,” he says.
Over in Yorkshire, at Rakusen’s, similar discussions are underway to try to cope with the rampant inflation.
“I don’t want the conversations any more than anyone else does,” Simpson says.
“But the magnitude of costs is so big, that we have to speak to our customers about putting prices up.
“At the end of the day, most commodities are priced in dollars. And, if the pound continues to devalue, we're going to end up paying more and more for what we need to make our crackers.”
