This morning I read an article in the business press headed “Surprise fall in Inflation Rate” It reported that in June 2017 inflation had fallen for the first time since October 2016.
Whilst this may have been a surprise to the authors of the article it should not have come as a surprise to anybody with an iota of economic understanding. In the immediate aftermath of Brexit on 23 June 2016 the pound fell substantially against other world currencies. The effect of that, was that bringing in overseas goods, was more expensive than had previously been the case and whilst in the short term there was an element of protection to the consumer as a result of forward purchasing by importers, it was inevitable that regardless of what was happening to the underlying price of the product on the international market, the price to the UK consumer would rise directly as a result of the fall in the international value of sterling. Thus from October 2016 we saw inflation creeping up on a month by month basis as the effect of these currency generated price rises worked their way into the system. We have now reached the anniversary of the Brexit vote and the pound has been relatively steady on the international markets for the last year and therefor on an annual basis which is how inflation is measured the effect of the sudden drop in the price of sterling against international currencies is no longer featuring as much into the inflation figures which will now be more based upon the changing in the underlying value of the products rather than the effects of the currency market. As such the drop this month in inflation which by this logic should continue moving forward should not come as a “surprise” but should have been expected.
Reading further in the article only caused my “blood to boil” further as it stated that “the news sent the pound sharply lower as currency traders adjusted their outlook for interest rates.” So we now have a situation that because inflation rates have dropped as a result of the pound being steady, the pound has now dropped in value which will again cause further currency effects into future months inflation, which will make these economic experts “happy” that inflation is rising and that therefore there is a positive outlook for higher interest rates which will then cause the pound to rise which will then in turn cause inflation to fall which then repeats the cycle.
We seem to be living in an era where the whims of market traders who have no economic background is effecting the day to day life for millions of ordinary people. The aim of a free market economy is that there is freely available information which can then be interpreted properly. The problem we have today is that the people involved in the investment arms of the major banks and investment houses do not have the necessary skills or knowledge to correctly interpret market movements and as such we have a failure in the free market when a drop in inflation arising out of the unwinding of historic drops in the sterling exchange rates comes as a surprise.