Inflation in the UK is hindering the household budgets as it has climbed to a four-year high since the Brexit vote. When the pound fell sharply after the vote, the economy started to suffer. In May of this year inflation rose to 2.9%, above the 2.7% that was expected by economists. Inflation has been steadily increasing since the referendum result a year ago, which triggered a sharp drop in the value of the pound and pushed up the cost of goods imported from abroad. Inflation was 0.3% in May 2016, a month before the Brexit vote. That´s a growth of 2.6% in inflation in just a year.
While higher prices for oil have added to the upward pressure of inflation, it really comes down to the weak pound. UK households are seeing higher prices for food and electricity, leaving less to spend on travel and non-essential purchases. As manufacturers are being hit by the weak pound for purchasing goods from overseas, the price rise of their goods for production will mean higher prices for consumers. It appears to be a catch 22, as wages are not keeping up with inflation which leads to the inability to purchase goods that, in turn, help the economy to grow and for inflation to lessen.
There is movement to pressure the newly elected government to help households cope with rising living costs. The TUC general secretary, Frances O’Grady, said “The election showed that working people are struggling. And the biggest price rises in four years won’t provide any comfort.” She also stated that “Working people are still £20 a week worse off, on average, than they were before the crash, and now rising prices are hammering their pay packets again. The new government must stop the real wage slide. Ministers must focus on delivering better-paid jobs all around the UK.”
“Too often there is more month than money left after pay day. Ending the public sector pay freeze and making sure all workers are paid a decent wage is an absolute must and it needs to be on the agenda for the Queen’s speech. Tim Roache, general secretary of the GMB union said. The average wage growth of 2.1% in March is not keeping up with inflation and the inflation increase is expected to widen the gap even further.
The Brexit negotiations are hindering the UK´s ability to shrink the gap between inflation and wages and will continue to do so until everything is settled but that is a long way off. Even interest rates are being affected. The Bank of England is keeping the rate at the record low of 0.25%. Oliver Kolodseike, a senior economist at the Centre for Economics and Business Research consultancy, said: “Under normal circumstances, the Bank of England would have a sufficient set of arguments to justify an interest rate rise. “Under the current circumstances of high inflation and low wage growth, increasing interest rates would only harm consumers further, as they grapple with trying to pay their mortgage and rising bills.
Minimal growth in wages, big growth in inflation, and a weak pound, have all led to a lag in consumerism and the end is not in sight. Paul Hollingsworth, a UK economist at consultancy Capital Economics, is predicting an even higher inflation rate, at around 3.2% in the fourth quarter of this year. This is due to the forecast in costs of production and the price increases feeding down through to the shops and the consumers. All of the UK is in a standby position, holding their breath so to speak, to wait and see what happens once the UK leaves the EU.
Politics can be seen to have what is called the butterfly effect. The election of Donald Trump, the results of the elections in France, the Brexit vote last June, and now the general election results of this month, among others, all play a part in how the currency is valued globally. In the aftermath of this most recent UK election, the pound sterling has slipped again. It was already low, have slumped and never recovered last year after the Brexit vote.
After exit polls predicted that the Conservative party would suffer a major blow in Thursday’s vote, the UK currency fell around 2 per cent. Investors have been spooked by uncertainty after this election ended in a hung parliament. This comes just days before the negotiations of Brexit begin. It slid a further 0.7% and failed to recover after the final results of the election were confirmed.
The Tory party had failed to secure a majority and the results on the markets were not good. The pound has lost more than 14 per cent against the dollar since last June’s Brexit vote. Some speculation surrounding a strengthening of the pound if the election results lead to a softer Brexit but there are many who remain skeptical about this. UniCredit’s chief UK economist, Daniel Varnazza, wrote in a note to clients: ““A ‘hard’ Brexit is almost a given,” “With Theresa May weak, the hard-line Euro-sceptics in the Conservative party, who are more organised than the Remainers, will be able to take the Prime Minister hostage in their pursuit of a hard Brexit. There isn’t any realistic prospect of this chaos leading to a rethink of the Brexit decision for the country.”
The current political uncertainty is having a dramatic impact on the pound and business leaders should take heed and come together to figure out ways to ensure the pound can be made more stable. There are many questions surrounding Brexit now, and the talks are going to have an even more unsettling effect on the markets.
Volatility of the pound will continue while the government figures out who will lead the country. The Brexit talks and negotiations will have the same effect. Even though the economists factored in what they presumed to be the volatility of sterling during the Brexit talks, even they are uncertain of what will happen in the near future. This is not good for attracting investors to the UK.
“Theresa May’s electoral gamble has catastrophically failed,” said Tom Stevenson, an investment director at Fidelity International. The market reaction to this unwelcome outcome is likely to hit UK shares, bonds and the pound. Markets will likely remain on the back foot while the difficult job of putting together a workable government is undertaken.”
Political uncertainty, election results here in the UK and elsewhere, Brexit, and the effects of the global economy, all are part and parcel of an extremely volatile pound and does not bode well for the UK as business continues to try to attract investments, Investments that seem to be waiting for everything to calm down before repatriating assets into the UK.
British holidaymakers visiting the Atlantic are currently facing higher prices as the pound corrodes with the US dollar, say experts. For the first time, the Sterling has gone below $1.48 since April, which translates to 14% fall as compared to $1.71 it traded in the summer of 2014. This change has changed everything as meals, hotel rooms, theme park tickets and car hire have become more expensive for British families explorers to the United States.
Consequently, the currency analysts say that the worse is yet to hit the pound as it is at a risk of hitting a 30-year low estimated at $1.30. This will raise shopping trips’ costs to the level of New York and Disneyland in Orlando, and Florida’s holidays. However, these changes will raise British’ exports to the American market as products made in British factories like cars and Scotch whisky will be more affordable to American buyers.
They recall that the last time the British pound traded at a low rate of $1.30 was the time when Margaret Thatcher was British Prime Minister, and Ronald Reagan was the president of the United States. According to David Swann, who is Travelex's bureau de change head of pricing, the rise in US dollar means that UK holiday travelers will see their pounds' worthless in the United States. He added to say that it is unfortunate for the British travelers who have already planned a trip to America.
Travelex said that currently £500 exchanges for $725, which is $116 lower than its value in July 2014. If the pound’s value falls to $1.30 on foreign exchange markets, then it is estimated that travelers exchanging a £500 would receive less than $650, which translates to $200 less that its value in mid-2014.
Last month the Federal Reserve increased the interest rates for the first time in almost a decade now, from 0 and 0.25 percent to 0.25 and 0.5 percent. Bank of England is claimed to be raising interest rates this year in the UK. This will increase the mortgages' costs and other loans for residents of the UK. However, analysts have given a warning against this step saying that if Britain hikes the rates, America will get more and this will lead to the pound dropping even further.
Many people tend to recall very well some of the terrifying events occurring on 15 September 2008, when Wall Street bank went under bankruptcy. As these sad news broke out, the atmosphere was filled with panic. Many were restless and could hardly find ways to transfer their savings to safer banks.
This situation was very frustrating as people just sat looking at their screens like statues not knowing what to do next. Even if there were some opportunities to be explored, they could not act since they were paralyzed. Phone calls were coming from family members giving suggestions to get as much money as possible out of the banks. Now as they try to recall those days, they feel humiliated by their vulnerability.
Two years later, these people who were very terrified when the incident occurred, they spoke as if they were not shaken by the event. However, the families who phoned their loved ones said that they were experiencing a domino effect. What they were afraid of is that the going into bankruptcy at such a huge institution could halt the financial system. This means that it could have been impossible to withdraw their money, and credit flow seized. This financial crisis was close to causing total failure of the global financial system. If this situation had occurred, then the global trade would have stopped working within a short period.
After the crash and threats of 2008, there has been a lot ignorance among the members of the public the political mainstream. The financial field tried as much as possible to hide the reality from the media by portraying themselves as innocent and that the crash was caused by greed or by some fault amongst the respective bankers. Even after the affected banks declared the need for significant changes in structure, people had doubts and questions about the reality of the crash.
Investigations began into the matter as well as reconstructions by writers, journalists and politicians. Many books have been published on this crash with extensive hearings and recommendations. However, they have not been given much attention by the public as they totally ignored the tragic event.
After the summer holidays have come to a close, many individuals around the world are left with a handful of wonderful memories and an equally large handful of foreign currency from their travels abroad. Although these exotic currency pieces may prove to be a delightful memento of the previous adventure, many people are left wondering what they can do to reap the value of the money they have brought back with them.
One of the most obvious solutions is simply to take the money back to a currency exchange broker and swap it for domestic currency. That being said, it’s important to evaluate exchange rates closely, just as you did during your time abroad, in order to ensure that you get the best deals possible on the money you are returning. Some experts recommend grouping large sums of foreign currency (if you traveled with friends, for example), and exchanging all of this money at one time, as it is likely that you will all receive a more optimal exchange rate.
It’s also worth noting that some foreign exchange brokers offer a “buy-back” option on leftover currency that will ensure that you receive the equal value (according to current exchange rates, obviously) without losing money in exchange fees. Although these services are much harder to find, it may be worth spending time before your trip researching available buy-back options in your area so that you know exactly who to purchase your currency with initially.
A final option may be to simply hold onto the money you’ve brought back, particularly if you are planning on traveling abroad again soon. Instead of losing fractional amounts of currency with each trade, you can simply keep the money in one currency pair and use it again when you resume your travels at a later point. This is especially recommended for business professionals and other individuals who find themselves “on the go” at regular intervals!
There are, obviously, no perfect solutions for this issue, but with a bit of creative, flexible thinking, you can ensure that you emerge victorious in the battle of the exchange rates. Good luck!