Inflation, Inflation, Inflation. When speaking about the current state of the UK economy the majority of people point all problems down to one issue, the rate of inflation. In the UK inflation currently sits at 10.5%, which is more than 5 times the Bank of England target of 2%. This has resulted in inflation in 2022 being at its highest rate in 41 years and is a definite cause of the weak economic position the UK currently sits in.
However, what is less frequently spoken about is the fall in value of the Great British Pound (GBP). The Pound has fallen to its lowest rate against the US Dollar (USD) in history with £1 falling to the worth of $1.03 at the end of September 2022. To put this into perspective, in June 2021 £1 was worth $1.42. The fall of the Pound has a had a negative domino effect on many aspects of the economy, including the inflation rates and the cost-of-living crisis. To understand the impact this has on the country we first need to understand what has happened to cause the value of the pound to fall.
What happened to for the pound to fall?
The UK is run by a free market economy. This means that the quantity and price of which a product/ services is produced is determined by the supply and demand of that product/service in the economy. For example, if Cadburys had to close one of their factory’s due to health and safety concerns and couldn’t find a replacement factory, then the supply of Cadburys chocolate bars in the UK would decrease. If the demand for Cadbury’s chocolate bars remained the same, then the price of the chocolate bars would increase as the demand outweighs the supply, and vice versa.
In the case of the weakening of the Pound the demand has fallen lower than the supply, therefore the price at which the pound is bought by foreign investors has fallen. This has been caused by a mistrust in the UK economy. At the start of September Liz Truss was appointed Prime Minister of the UK and introduced an economic policy with two main aims. In her plan she outlined that there was going to be a tax decrease and that there would be an additional £200 billion in government spending aimed at helping with the cost of living and cost of electricity crisis'. This sounds like a good plan to those living in the UK currently facing hardship however it does not have the same appeal to foreign investors who now view the Pound as an unstable currency to invest in.
How is a weaker pound affecting people?
1. Foreign goods are more expensive. The UK relies heavily on imported goods such as oil and food. A weakened currency has resulted in the price of imported good increasing, which has a direct effecting on the inflation rate we are currently facing. This is having had a heightened impact on the working class as an increase in the price of their weekly shop is taking up a higher percentage of their income as opposed to the upper class. This is evident with 11% of adults in November 2022 reporting being hungry due to the fact they lacked funds to buy food.
2. Increasing Interest Rates. The Bank of England has increased Interest Rates to 4% with the aim to reduce spending in the economy, which will aim to reduce inflation. However increasing interest rates has different effects on different classes. For the working class, increasing interest rates will lead to an increase in costs. The cost of monthly mortgage payments will increase for homeowners, which will also affect those renting as they are likely to see an increase in rent reflecting the increase in mortgage payments. As well as this, credit card debt becomes more expensive as the amount that needs to be paid back on top of borrowing is controlled by interest rates. For those who have no credit card debt and are homeowners without a mortgage the increase in interest rates won’t directly affect them, unless they have money in savings. If this is the case then they will benefit from the increase in interest rates as they will receive greater returns for their money in savings accounts.
What now?
The value of the Pound is determined by the international market. While the value has been slowly increasing since September 2022, the government need to introduce policies to increase its international appeal in order for it to return to the strong currency it once was.
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