Monday, October 3, 2022

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Pound drops to new 37-year low as inflation rises

The pound has hit a new 37-year low against the dollar as new official retail data painted a bleak picture of the UK economy.

The British pound fell below $1.14 on Wednesday morning, hitting its worst point since 1985.

The drop came after recently published retail figures showed a 1.6 percent drop in August, compared to the 0.5 percent drop economists predicted.

“This morning’s retail sales in the UK still showed a deteriorating consumption picture in the UK, stemming more from the continuation of a steady downward trend from last summer than from the single stark data point in a rather volatile series,” said Francesco Pesole, currency expert. at ING.

“This was the last important piece of data before the Bank of England meeting on Thursday and has hit the pound this morning.”

The pound gained some ground early in the afternoon but was still trading about 0.5 percent against the dollar, buying just over $1.14. It lost 0.3 percent against the euro and also traded at just over $1.14.

Olivia Cross, economist at Capital Economics, said the numbers suggested “downward momentum is gaining momentum,” supporting the view that “the economy is already in recession.”

The drop came on the 30th anniversary of Black Wednesday, when the UK had to withdraw from the European Exchange Rate Mechanism (ERM). The ERM is designed to ensure that exchange rates between European currencies remain stable.

Governments and central banks had to ensure that their currencies did not fluctuate more than 6 percent against their European neighbors – a figure the UK missed on Black Wednesday in September 1992.

The pound’s value fell rapidly and the government of John Major spent billions trying to keep it afloat, but it couldn’t keep up with the currency traders desperate to sell pounds.

It caused the government to withdraw from the ERM, damaging the Conservative Party’s reputation for dealing with the economy for years.

Sterling has been weak against the dollar for months, largely due to the strength of the US currency. The euro is also at a multi-decade low against the dollar.

The decline comes as UK inflation fell slightly this week to 9.9 percent, after reaching its highest level since 1982 in July, according to the Office of National Statistics.

While experts predicted the figure would remain unchanged in August, falling fuel prices helped push it down.

“The decline in annual inflation in August 2022 mainly reflected a decline in the price of motor fuels in the transportation portion of the index,” the ONS said.

“Smaller, partially offsetting, upward effects came from price increases for food and non-alcoholic beverages, miscellaneous goods and services, and clothing and footwear,” it added.

Despite falling below 10 percent, George Lagarias, chief economist at accounting firm Mazars, said inflation would not fall significantly for the time being.

“The higher energy prices of recent months have fully fueled most supply chains and it will take months of lower oil before end-user prices fall significantly again. Inflation could remain a central theme until at least the end of the year,” he said.

“However, input costs have started to come down and we should eventually see this feed through to overall prices.”

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