I am sure many of you have seen the news about the pound struggling against other currencies, and wondered – what has this got to do with me? But it may well do. We take a look at how a falling pound affects you.
How A Falling Pound Affects You – Rising Prices
The price of products and services imported into the UK from outside will rise in response to a decline in the value of the pound.
That’s because it costs more for UK-based businesses to import goods like food, raw materials, or parts when the pound is weak relative to the dollar or the euro. Companies may pass the additional prices on to customers by businesses.
It happens at a time when rising food and fossil fuel prices are causing the cost of living to rise. And the rise is at its quickest rate in almost 40 years.
Who Takes The Hit?
Whether or not a company decides to pass those expenses forward to customers depends on a variety of factors. For instance, supermarkets might have pre-purchased a portion of their inventory.
The chief executive of Carlsberg Marston’s Brewing Company, Paul Davies, said that the pound’s decline would result in an increase in beer costs.
He said the decline was “worrying” for the British beer business. It imports beer and hops from Europe and the US. He made his comments on the BBC’s Today show.
Prices may increase for consumers purchasing products from American businesses. According to analysts, part of the reason why Apple recently increased the price of the new iPhone 14 Pro range by up to £150 in Britain over the iPhone 13 Pro is because of the depreciating pound.
How A Falling Pound Affects You – Energy Price Pressures
One of the prices that is also probably to go up if the value of the pound declines is energy costs.
Even if the gas is generated in the UK, the cost of all the gas that the country uses is determined by the dollar.
Following the conflict in Ukraine, individuals and companies have had to deal with skyrocketing gas and power costs. Prime Minister Liz Truss has been forced to propose solutions.
We have seen a decline in wholesale gas prices from recent highs in the last few days. However, the decline in the value of the pound sterling could put suppliers under even more pressure.
Rising Mortgages?
If businesses decide to pass on greater expenses to customers, the weaker pound would probably drive up inflation, which measures how the cost of living varies over time.
The Bank of England expects to increase interest rates even further in order to combat increasing inflation. This week they announced no immediate action. But experts expect these rises to happen soon.
By raising the cost of borrowing and enticing individuals to borrow less, spend less, and save more, it is one method the Bank is attempting to rein in rising prices.
Some economists predict that the bank may call an emergency meeting this week. This meeting is in order to hike rates earlier than expected.
Due to this, monthly expenses for about two million UK residents with tracker or variable rate mortgages may increase even more.
Not Just Mortgages Affected
Interest rate increases may still have an impact on you even if you don’t have a mortgage since lenders may decide to raise the fees they charge for credit cards, bank loans, and auto loans.
However, increased rates “will also harm borrowers on variable arrangements,” according to Sarah Coles, senior personal finance expert at Hargreaves Lansdown.
In addition, rates on savings accounts have a “awful long way to go” before they begin to catch up to the rising cost of living.
Exports
By contrast, some businesses in the UK could get a boost from a fall in the value of the pound against the dollar or euro.
A cheaper pound makes it less expensive for people from around the globe to buy goods and services from British firms, making them more competitive.
It could provide some benefit to firms struggling with additional red tape and customs checks introduced after Brexit. According to recent European figures, exports to the trade bloc declined by nearly 14% in 2021 compared with the year before.
The weakness in the pound also makes the UK an attractive place for international investors, particularly from the United States.
UK firms have already seen big takeover bids from investors, such as fashion chain Ted Baker, which recently agreed to be snapped up by the US company behind the likes of Forever 21 and Juicy Couture for £211m.
Foreign Travel
The drop in the value of the pound implies that UK residents who are considering international travel won’t be able to spend as much on accommodations or dining out.
Anyone who is considering a vacation to the US should keep this in mind in particular.
Given both fuel and aircraft leases are frequently denominated in dollars, the decline in its value could potentially cause airlines to incur significantly higher expenditures.
