Marmite, the gift on a plate

 

Last month, the harsh realities of the unpredictability in the UK following the vote to leave the EU hit home. Marmite, along with other family favourite brands from the Unilever stable started to disappear from the shelves of Tesco, Britain’s largest supermarket chain. The value of sterling has been steadily declining since the vote, making imports more expensive, so the parent company decided it was time to put prices up by 10% to shore up thinning profit margins.

 

Tesco were reluctant to put prices up to their customers, so refused to pay up, and started taking them off the shelves. For months before, during and after the Brexit vote, current and future prospects for prosperity had been expressed as graphs and percentages in a way that meant little to many, but here was the first manifestation of Brexit in a way that immediately made sense.

Britain is a net importer of stuff, products, raw materials and services so any drop in the value of the currency is going to make these imports relatively more expensive. Everything from fuel prices at the pumps, to electronic goods and your foreign holiday is going up in price. The value of a currency is both a practical, and emotive concern. Your pound doesn’t go so far, so you are a little poorer, the prices in the shops goes up, fuelling inflation, that’s bad, isn’t it? And the perception that the value of something going up is good, and going down is bad sounds right, but is it?

 

Britain over the last two decades has been importing more and more, and exporting less and less. Spending borrowed money on imported goods while the way it makes a living has been slowly contracting. This has not gone unnoticed by the bank of England, and for a good few years has been trying various methods of reducing the value of the currency, by quantitative easing policies, or printing new money. This intended drop in Sterling’s value will have a double, or even triple whammy effect.

 

If you effectively weaken people’s ability to spend, they are likely to reduce the amount of money they spend on imported goods and services, returning their money to the domestic economy instead of sending it overseas. At the same time, UK exporters will see the prices of their wares drop in price to foreign buyers, boosting output, and as a result increasing employment, and boosting growth in the national economy. The third effect is that inflation will immediately increase. This sounds like a bad thing, especially if you are old enough to remember the double digit inflation of the 1970’s, but it is generally reckoned that an inflation rate of around 2% keeps everything ticking over nicely. For the last few years in the UK, and for that matter, much of the rest of the developed world, it has been effectively zero. This can, and does put the brakes on an otherwise recovering economy.

 

The problem has been that everything the Bank of England has tried to do, with historically low interest rates, and increasing the supply of money has come to nothing, principally as most of the UK’s primary competitors, the US, Eurozone and Far East have been doing more or less the same things. Effectively we have been seeing a slow motion currency war with everyone trying to devalue faster than everyone else, more or less cancelling each other out.

 

For the record, it should be noted that during campaigning for the EU referendum the Bank of England, broke with the protocol of being apolitical to come out on the side of the ‘Remainers’ and there is no reason to assume that they have since changed their stance. However, the post referendum chaos in the markets as UK politics works out what is going to happen next has handed the B of E a gift on a plate, competitive devaluation, and a boost to inflation that 8 years work has so far failed to deliver, and I don’t think they will be looking this gift horse in the mouth.

 

The British public need to see a little further beyond the price of Marmite, or a fortnight in Mallorca and regardless of how they voted in the referendum, see this as an opportunity not to be missed.

 

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