Inflation Nation

Oct 24, 2016 | by Franck Cushner, CFP®

Weeks of weakening and the sterling shakedown of October 6 means that the United Kingdom has suddenly gotten a lot cheaper for outsiders and will get quite a bit more expensive for residents.  The designed-element of GBP devaluation is, in one part, to hinder immigration incentives (as the wages earned in pound are worth less than before).  However, the collateral damage will be a period of high inflation – both from cost push and demand pull dynamics – laid across the chest of UK’s residents.  For cost push, imported raw materials, intermediate goods, and finished goods are now more expensive to UK firms, who will either not carry the product or pass the cost to consumers. For demand pull, pound-produced exports are more attractive to foreigners, as such, the supply of goods is likely to dwindle faster than the fall of UK’s consumer market demand, raising local prices further.  While May’s government does want to cheapen the pound, they must institute measures which control the inflation – before the pound is pence.

In real dollars, what does this mean? 

Let’s say for example you purchased a £500,000 home in June.  This, at the time, would have cost you roughly $725,000.   Today, that same home at £500,000, is worth about $620,000 – a loss of 14.5%.

What does this mean going forward?

The real game changer ahead is parity with the euro. As these levels approach, expect emotion to control the conversation.  Volatility will remain high for the fall and winter – especially as the government pushes for Article 50 (2 year withdrawal deadline) by March. Plan for decline of up to 10% for the next six months.  The hard Brexit is hanging above the pound’s crown like a sharpened guillotine and all the tough rhetoric will only loosen the grip.

What should I do?

Enjoy a nice cheap holiday in London – ideally before they replace wallpaper with the Royal visage.

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