MacroScope

Rip-off Britain or the cost of cheaper sterling?

February 17, 2009

Inflation is plunging faster than analysts are forecasting just about everywhere in the developed world. Except for Britain. Those accustomed to high prices and inflation-busting increases in tube and rail fares at the start of every year were probably not surprised.

A tiny decrease in January inflation to 3.0 percent from 3.1 percent, left plenty of City analysts scratching their heads and talking of a blip in the data that is sure to be followed by significant drops in months ahead.

The puny move is all the more puzzling given the fact that forecasters have been suprised by the speed inflation has been falling elsewhere. In the euro zone, inflation has already tumbled to just 1.1 percent.

Until you consider the huge drop in sterling. The pound has collapsed over the past several months — so much so that droves of continental Europeans rushed to London over the Christmas sales for bargains when sterling fell so far it was nearly on par with the euro. But it takes time for exporters to adjust their prices. Recent data show sharp rises in the cost of non-oil imports, which make up about half of retail goods in the UK.

Visitors to Britain often grumble about bad weather and high prices. For Britons, whose currency is now worth a lot less than it used to be, the weather is still bad and prices are still high. 

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