The fall in the value of the pound.

Following its drop after the referendum, sterling is currently one of the worst performing currencies in the world, comparable with those of Malawi and Haiti , and there has been much written recently about  its decline and whether it is beneficial or not? Economists, who frequently assume “ceteris paribus” in order to analyse the effects of a change in a variable without having to worry about the way real life intrudes on economic theory, find this a difficult question.The answer depends a great deal on who is answering. If you went to the USA at half term then your overseas spending is likely to have cost you about 17% more than it would have done before the vote. However if you are a car manufacturer, given that about three quarters of your output is sold overseas, you are likely to be smiling, as are many UK online businesses and those in the tourist industry. However it is possible that exports will fail to  rise and imports fall sufficiently to benefit the economy. Recent history has suggested that the UK is  wedded to expensive, high quality imports and therefore the positive effects of the devaluation will be small.

The current economic situation does not provide much of a guide.GDP growth is higher than expected at 0.5% and employment has remained at a record high for the three months to August. However consumer surveys reveal fears that inflation will exceed wage increases and  eat into living standards, reducing real consumption.

Fuel prices have risen, Apple increased the price of its computers by approximately 20% last week , Greggs has warned of price increases next year partly due to a rise in the price of overseas ingredients and Marmite has also been in the news. Although inflation has risen to 1.0%, only a part of this, such as rising fuel prices (since oil is priced in dollars) is due to the fall in sterling and the drop in the value of sterling will increase inflation for some time to come. As a result, UK living standards might fall. Nevertheless it is possible, according to economic theory, that the fall in the value of the pound will, after a time lag (the J Curve effect) cause export values to increase and import values to fall  (as long as demand for UK exports and imports are sufficiently elastic) and therefore  output and employment in export and import substitute industries could well increase. If this is correct,  one will be comparing a significant increase in well-being for a small sector of the population- those newly employed – with a small drop in living standards for those paying higher prices for fuel and Marmite.

Finally, if you think you are happy with all the possibilities discussed above, remember that we still have to factor in possible tariffs on imports, depending on what sort of agreement the UK reaches with the EU..


Inflation – it isn’t about sterling, yet – BBC News

Today’s jump in inflation is more to do with low prices last year than it is to do with the collapse in the value of the pound. That is still to come.

Source: Inflation – it isn’t about sterling, yet – BBC News

An increase in the rate of inflation hurts borrowers and those on fixed incomes as inflation erodes the value and purchasing power of money. On a personal note, my drive to school is becoming increasingly expensive as the price of oil recovers from the lows of 2015. The fall in Sterling will see prices at the pump rise further. However, there are winners. Borrowers will see the real value of their debts fall. The Government, as the UK’s largest borrower, will be one of the beneficiaries.

Still, the higher price of imported goods may end up hurting exporters, the direct beneficiaries of the fall in the value of the Pound. Although the price of British goods in foreign currency terms is falling, the costs of imports are rising, so British exporters may see their costs of production rise offsetting, to some extent, increasing profits thanks to higher foreign demand.

At present, the inflation rate remains below target, so, perhaps, a little more inflation is good thing. However, when the rate rises above target the MPC will be under pressure to hike the bank rate. The UK debt mountain has grown rapidly thanks to access to very cheap credit, higher rates will hurt those with large mortgages, car loans, credit cards, etc, and we could see the UK slip back into recession as result of a collapse in consumer spending.



Do we need to tackle monopsony powers in the labour market?

Source: Do we need to tackle monopsony powers in the labour market?

Economists suggest that the balance of power in the UK labour market has shifted to the employers, evidenced by the growth in zero hours contracts and the ‘gig’ economy. Alan Manning (LSE) suggested that all employers wield monopsony power to an extent and I, for one, am inclined to agree. I highly recommend looking at Manning’s work in more detail for a deeper understanding of monopsony power in labour markets.

A Little Nudge

The Government’s Nudge Unit (or, to give it its correct title, the Behaviour Insights Team) has been in the news again recently. Their latest investigation involves an attempt to reduce the number of inappropriate calls to the 101 number (the number where one can report crimes, traffic accidents and minor offences). The problem which they are addressing is that 20% of calls to this number are classed as inappropriate and involve matters which are not of police concern, such as failure of the local council to empty the bins, or the high price of a restaurant meal. They found that delaying answering for 6 seconds reduced inappropriate calls by 75%.

Nudging people to behave takes many forms but one of the most successful is to make things easy for people. Thus healthy options are at the front in the cafeteria, many streamed TV programmes automatically go on to the next episode and, more importantly, British workers are automatically enrolled in work-place pensions unless they opt out.

The Nudge Unit was established in 2010 to help government departments improve their success rates in diverse areas by taking account of the way people behave. For example an experiment in vending machines in Australia resulted in a 20% switch from the most sugary drinks to alternatives simply by labelling the most sugary ones in red. Writing letters to the GP surgeries prescribing the most antibiotics, telling them that neighbourhood surgeries prescribed less, resulted in a 3% fall in prescriptions.