The Inflation Factor In A UK Currently Courting Hard Brexit

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

If there is one word that Britons will be well aware of by now, it’s Brexit. The consequences of the famous referendum have had a huge impact on the UK's currency (Sterling) and will undoubtedly dictate the political landscape in Britain for years to come.

The UK exiting the EU is going to bring material changes into the lives of everyone in the UK and while quantifying all these changes is outside the scope of this article, we will deal within one major trend that everyone living in the UK can expect in the immediate future: inflation and increased costs of everything the UK imports.

Runaway inflation looms on the eve of hard Brexit

Due to Sterling losing so much value so quickly, the economy has plunged into what can only be described as very turbulent times. Most equilibrium levels in consumer commodities will be reset and it remains to be seen when the GBP will start to stabilize. Even before the Brexit vote, those who supported remain had foretold great prophecies of a much higher cost of living, luxury and price squeezes all around. As the first vestiges of this start to appear we have to pause and take a look at the basic principles that are at play here.

In the wake of the risk and uncertainty associated with UK after a hard Brexit, Sterling has depreciated against its trading partners currency bucket and where once the USD/GBP exchange rate was $1.58, it now stands at just $1.22. This equates to a roughly 22% depreciation in just over 1 year. To the layman, this is a mind-boggling amount as far as currency exchange rates go – where changes in 4 or 5 decimal places can affect a very large sum of transactions.

It is going to become more expensive being a tech enthusiast in the UK

Since there is no advanced economy in the world which is truly self-sufficient, we can easily figure out the theoretical implications of this change. The first and immediate effect would be that this is going to create disparity between individuals who were earning their salary in GBP and those who were earning it in any other currency. An individual who is paid in $ would find themselves in a much more financially stable position than someone who is paid in GBP.

Someone who is paid in GBP, however, would find that in some cases their purchasing power decreased for imported goods given the collapse in the pound. This is something that will hold true for any commodity or industry that utilizes imports since those will be affected directly by the exchange rate change. Since we are a technology publication its worth pointing out that since most of the tech industry is priced in US Dollars, gadgets and PC peripherals like GPUs are going to get much more expensive in the UK than before.

Chatting with our friends at Overclockers UK, the beloved online e-tailer, we found that prices have been raised significantly:

  • The EVGA GTX 1080 FTW was launched at £599 and is now at £710.
  • The Intel i7 6950X CPU was launched at £ 1399 and is now at £1579.

This shows a price increase of 13% to 19% in just the PC market and conforms with a high correlation to the GBP drop. While this was something that was pretty much expected considering the US origin of the goods involved, even Dutch based companies like Unilever are insisting on increasing the cost of their products to offset the weakening pound.

But is there a silver lining?

There are two ways that the cost of the weakening pound can be borne: either it can be absorbed into the margins of the company selling the product or it can be borne by the consumer themselves, and in most cases companies are trying to shunt the burden over to the consumers. Tesco recently pulled quite a few products because of arguments with Unilever on who will bear the cost of the weakening pound, although this has today been resolved.

It’s not all doom and gloom though. When you start a course in economics, the first thing you learn is supply and demand. Because the pound has weakened considerably, a silver lining to this would be the fact that exports will be stimulated and at a time where UK is already looking for trade partners – this could be a very welcome side effect to an unwanted ailment.

Not only will it be easier for British based startups to trade in the international market but it would also encourage exports from the UK to all over the world. Since the average purchasing power of any entity outside has remained relatively unchanged (although the Euro has been in long term decline itself), as the pound is now weaker, they will in theory be able to buy more British goods and in the process stimulate exports. Of course, the underlying assumption here is that British companies will not offset the weakening pound by simply marking up their products. If that starts to happen, then the only upside to all this could be in jeopardy as well.