Inflation Means Inflation

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Last week we had Marmite Wars with Unilever and Tesco unable to decide on how to collude on prices and this week we have the inflation figures showing a 1% CPI rate of inflation. CPI is the cost of a list of commonly bought items and househodl expenses, the consumer price index. What inflation does is make the Pounds in your pocket worth less because the prices of everything are going up so the Pound buys less. Since June 23rd we have seen the valueof that Pound drop by 20% against the US Dollar and about that for the Euro. The only people to have felt the pain so far are UK travellers who have needed to buy travel money. Soon everyone will notice the difference.

In theory the weak Pound should make British made goods cheaper for exporters to sell in Europe and America but if any of your raw materials are imported then they have gone up in price buy that 20% figure so you are not going to win. Likewise if you use oil or gas in your factory then that is all priced in US Dollars so has gone up by 20%. Sugar, flour, rice, coffee infact nearly all the crops sold around the world are all traded in US Dollars and have gone up by 20%. British made cars intended for export contain about 50% imported parts.

So what is happening is that manufacturers are finding all their raw ingredients or parts are going up by that 20% figure so to still make a profit and protect jobs they need to put prices up by up to 20% (although about 6% seems to be more common right now). So we will see the prices of everythign going up even if it is locally made. As we suddenly find we have less money in our wallets at the end of the week that wil put pressure on employers to offer bigger pay rises or face having staff who risk falling into debt just trying to live. Those pay rises add to the businesses costs and drive prices up. That is the danger of inflation and how it forms a vicious circle.

Long before that circle forms though outside investors can see the falling value of the Pound and know that if they invest in the UK and specifically in the Pound on the currency markets then their investment will lose money. That puts off investment and makes existing investors try and get their money out before the inflation cycle starts. That further devalues the pound and compounds the problem.

At the end of it all the people who notice the effect the most are people who need travel money. You will notice it in the rate you are offered and you will notice it in the amount you can afford to budget for spending money. It has never been more important to search around for the best rates. Only last week it was revealed that at Airport bureau de change operate at a 25% profit margin.

Posted by Peter Rudin-Burgess

Peter Rudin-Burgess

Peter is one of the founding partners for both Compare Holiday Money and Currency Buy Back. He regularly blogs on financial matters and writes content for a number of blogs in the travel industry.

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