The fall in sterling has few benefits and many costs – The Economist

Consumer-price inflation will probably hit 3% in 2017

IN THE past year, sterling has depreciated by 15% in trade-weighted terms, as investors have lost faith in the British economy following the vote to leave the EU. This makes it one of the world’s worst-performing currencies, alongside the Nigerian naira and the Azerbaijani manat. The hope was that the fall in the pound would spur export-led growth, especially in manufacturing. The reality is that Britain is looking at a nasty combination of high inflation and stagnation.

Data released on December 13th show that inflation in November rose to 1.2%. This is the highest reading since October 2014, and was above economists’ forecasts. Some goods that are highly import-intensive rose sharply. Britain imports over 80% of its pharmaceutical products, and their prices saw year-on-year growth of 2.5%.

Still, the impact of the weak pound has not yet been fully felt. Many British importers have used currency hedging to minimise the short-term impact of sterling’s depreciation (for instance, by loading up on foreign exchange before the referendum). Food prices actually fell in November, by nearly 2%. When these hedges expire, however, retailers will raise their prices. Some already have. In some supermarkets Marmite, a yeasty spread at the centre of a pricing controversy a few weeks ago, now costs 13% more than it did a few months ago. Consumer-price inflation will probably hit 3% in 2017, but some economists see it going higher than that.

So far the damage caused by higher inflation shows little sign of being offset by an export boom, contrary to what many Brexiteers predicted at the time of the referendum. Trade data released on December 9th suggest that the weak pound has made little difference to exporters’ fortunes. Capital Economics, a consultancy, says that if particularly volatile goods are excluded, the three-month annual growth in goods-export volumes has not seen any meaningful rise since June. The trade deficit in the third quarter, indeed, was the highest since 2013.

This is not a big surprise. British exports compete predominantly on quality rather than cost, making customers relatively insensitive to price changes. And British manufacturers have supply chains stretching across the world, so weak sterling pushes up their costs. Manufacturers’ input costs are now rising at 13% a year. In 2017 exports may increase a little, but there will be no boom. The weak pound is a sign of the weakness of the British economy, not a solution to it.